Resurgent Vodacom

Strategic lapses and a convoluted shareholder structure have meant Vodacom has failed to extend the leadership position it enjoys in its domestic market of South Africa to significant parts of Africa. In the company’s first change of leadership since it launched services in May 1993, incoming chief executive, Pieter Uys, describes how a converged strategy and the embrace of the economic, technological and regulatory transformation occurring across Africa and the world, is set to drive Vodacom’s long-awaited ascension to the top tier of pan-African communications providers

Pieter Uys, incoming CEO of Vodacom Group

Vodacom, South Africa’s 25 million-strong network operator, stands at the precipice of fundamental change that will either catapult it to the heights of Africa’s telecoms market, or perpetuate its inability to press its domestic advantage into other parts of the African continent.

As Comm. went to press, Vodafone, a 50 per cent stakeholder in Vodacom had tabled a US$2.48 billion offer to acquire an additional 15 per cent stake in South Africa’s leading communications network operator by subscriber number. A 50/50 joint ownership structure between Vodafone and South Africa’s state telco Telkom has in the past blighted Vodacom’s ability to act nimbly in the quickly consolidating African telecoms market, leaving Vodacom a second tier pan-regional player.

“It is not the best situation to be in when you have 50/50 shareholders; given their different strategies, and the possibility of conflicts arising due to moving into the same markets with convergence happening,” incoming Vodacom Group CEO Pieter Uys tells Comm. in an exclusive interview. “It is difficult in a short time to get a decision made. It is not impossible to, but it takes longer, and in a very competitive environment it is critical to move quickly.”

Vodafone’s desire to gain a controlling stake in Vodacom became a key component of former Vodafone CEO Arun Sarin’s resurgent emerging market focus, which gained momentum in his last two years of tenure, and the UK operator has never been closer to clinching the deal than now. If successfully concluded as is widely expected it will herald a myriad of knock-on effects that are likely to have a greater impact on Vodacom’s operations outside of South Africa rather than within the country.

“Now at the moment if you look at what is happening around us, Vodafone has made an offer to gain a larger stake in Vodacom. The offer is to buy 15 per cent, which would take it to 65 per cent,” Uys confirms. “And then what would probably happen early next year is that we will list the Vodacom Group if the transaction goes forward, and that scenario is one that will hopefully make life easier for us to move quicker because there will only be one big shareholder we’ll need to convince of the strategy,” he adds.

It is clear that Vodacom’s senior management overwhelmingly prefers the prospect of Vodafone acquiring a majority share in the operator, though Uys is willing to consider alternative prospects – at least prima facie – should the desired option not come to pass.

“Now if it goes the other way, it is also fine because the same applies then; we’ll have one strategy we can execute on and sell to our shareholder,” Uys states. “Where it is going to go, at this point it is not 100 per cent sure. The transaction was approved by Cabinet but there were certain conditions that they still need to iron out, and we are hoping to reach a conclusion in a matter of weeks.”

Should the more likely and preferable outcome come to pass, and Vodafone raises its equity stake in Vodacom to a majority position, Vodacom’s foray into Africa is the area of the South African operator’s business that is likely to be most significantly impacted. Put simply, Vodacom has failed to replicate its domestic success and market leadership in the rest of the continent, and much of its timidity in pursuing African opportunities can be explained by having had its fingers burnt in 2004 when it attempted to take over a Nigerian mobile operator, only to be repelled from the market on the back of a messy court battle orchestrated by Africa telecoms maverick, Strive Masiyiwa.

At the time, Vodacom’s failure in Nigeria cost Andrew Mthembu, then Vodacom’s deputy CEO in charge of international expansion, his job and resulted in the South African operator taking a hiatus from regional development. This period coincided exactly with the entry of Middle East investors such as MTC Group (now branded Zain), and Etisalat into Africa, and the rapid regional expansion of domestic competitor MTN into the rest of the continent, with Vodacom failing to participate in these developments in any meaningful way.

Market speculation suggests that early on, Vodafone demarcated the geographic scope of opportunities that Vodacom could be pursue, limiting these to sub-Saharan Africa, while the UK operator held sway across North Africa. This model has no doubt evolved, with Vodafone having established a presence in markets including Kenya and more recently Ghana, while Vodacom has operations in the Democratic Republic of Congo, Tanzania, Mozambique and Lesotho.

The combined Vodafone/ Vodacom footprint is likely to evolve even further in the short-run, with Uys believing that there are still opportunities and synergies to be leveraged across Africa.

“We are hopeful that Vodafone will see Vodacom as its vehicle into Africa and involve us in everything that it does here on the continent,” Uys states. “This will not extend to the old investments that they have like Kenya and Ghana, but will be related to what is happening on the continent with the big players like Zain and MTN. It is becoming more critical for us to have a larger footprint, and we don’t need direct access and investment in all markets to have that footprint,” he adds.

With the relationship between Vodafone and Vodacom poised to grow closer, Uys points to the potential substitution of the Vodacom brand with the Vodafone one, as the two companies align their corporate strategies and move forward with a single vision.

“If you look at what is happening on the continent, it is important to be not just a blue dot at the southern tip of Africa, you need to have a more global presence to offer services,” Uys asserts. “So either Vodacom needs to quickly develop its footprint in Africa or it is good to become part of a big, global player. Vodafone has that and if I take the Vodafone brand and group across the continent, it will quickly give us that capability. If we don’t rebrand it could be confusing.”

And while Uys claims that no final decision has been taken on the question of rebranding Vodacom, in much the same way that there is an obvious preference within Vodacom to see Vodafone acquire a majority stake in the company, there also appears to be an determined inclination to see the Vodafone brand play a more prominent role in Vodacom’s activities going forward.

“We have not made a decision but I think a likely scenario is that we would definitely bring the Vodafone brand into it. We might have a dual brand, but the Vodafone brand will definitely give us a lot of benefit in order to quickly become an international player that operates across the whole continent,” Uys says.

Underpinning Vodacom’s intended move further into Africa is the operator’s converged communications strategy, which it articulated in South Africa in February. The operator announced a capital investment of R2.5 billion (US$244 million) over the next five years that would reposition it from being a mobile centric network provider to a leading provider of converged information and communication solutions.

Vodacom established a new division called Vodacom Business, which was headed up by Uys in his capacity then as Vodacom chief operating officer, and the unit is aimed at providing end to-end converged solutions and services for the corporate and SME markets.

“If we sit back and do what we have been doing for the last 15 years we will definitely lose customers because it has become easier to offer a virtual offering, where you can package something and offer the service,” Uys suggests. “So we have to gear ourselves to be in the converged market. We have built two big data centres [in South Africa] now, which are state-of the-art and world class, where we are hosting applications and systems for corporates.”

Vodacom has bolstered its ambitions to become a converged communication provider through acquisitions aimed at plugging gaps in its solutions portfolio. In August the operator announced the acquisition of a shareholding in Storage Technologies Services (StorTech), a managed enterprise data centre services company providing a range of storage and security services. Vodacom purchased a 51 per cent stake in the company.

In the same month that Vodacom confirmed the StorTech deal, it went on to announce the acquisition of the carrier services and business networking subsidiaries of Gateway Telecommunications for US$675 million. Gateway is Africa’s largest independent provider of interconnection services via satellite and terrestrial network infrastructure for both African and international telecoms companies.

Gateway also provides end- to- end connectivity solutions to multinational corporations operating across the region and has a presence in 17 countries throughout Africa and Europe, including the key market of Nigeria. Gateway reported US$257 million in sales in 2007.

“With respect to the Gateway Communications transaction, it is really to take that concept into the rest of the continent, where we have not done a lot for a while,” Uys contends. “With Gateway we are present in many other countries in Africa and it’s easy to go from one thing to the next once you become part of the business in that country, with elements such as a converged licence and fixed-mobile convergence, things develop.”

Uys also believes that the global financial crisis is likely to impact what investors are willing to pay for properties in Africa, suggesting that values that had become very high may stabilise or even fall, offering Vodacom the chance to reassess some opportunities.

“[Deals in Africa] were becoming very expensive, but valuations are starting to come down and we will look again,” Uys says. “And as Vodacom and Vodafone together, we can target larger possibilities than what a Vodacom on its own would be able to do because a combined approach would put us in a league where we can look at larger things.”

Domestically, Vodacom is looking to embrace the paradigm shifts taking place in that market. Uys estimates that SIM card penetration in South Africa stands at around 100 per cent, with close to 45 million active SIM cards in circulation in a population of between 45-50 million. However, in terms of people penetration, this figure is estimated to be closer to the 70–75 per cent mark, and Uys is confident there is still room for growth in the traditional business model.

Churn is high, and not just in South Africa, with prepaid churn in the country appearing to be levelling out at around 40 per cent. Thus Vodacom and its competitors are making a significant effort to find additional growth in South Africa given that at the country’s market penetration levels; all that is left is lower ARPU subscribers who have to be made profitable customers.

In its financial results for the year to the end of March 2008, Vodacom reported that subscribers in South Africa increased by 7.9 per cent to 24.8 million, while revenue increased by 17.1 per cent to R48.2 million, boosted by a 49.7 per cent increase in data revenue. EBITDA for the period increased by 15.7 per cent to R16.5 billion, while net profit after tax came in at R8 billion, up 21.3 per cent year-on-year.

Growth in competition and the potential reduction in consumption of telecoms services by subscribers are factors Vodacom is looking to have to contend with in the South African context, though Uys remains confident that growth prospects remain.

“We will not see 20 per cent growth at the revenue level, but I think there is still a year or two remaining for double-digit growth at the revenue line, and if you bring in other services, you will have margins come down slightly,” Uys forecasts. “But if you don’t go there, your growth will stop completely. A lot depends on where the global economy is heading in the next 12 months and how soon the world will recover,” he adds.

Uys envisions a lot more efficiency coming into what Vodacom does, and expects the operator will also have to tighten its belt, suggesting there is still room to do that.

“If you look at South Africa, we clearly have to find different things to do. In the past it worked for us to democratise telecoms and empower because the more you empower people, the more they will move up in life and become part of the formal economy. And we shall continue doing that. But with technological advancements it is possible for us to add new value to the lives of subscribers,” Uys states.

Vodacom is thus moving to become increasingly technology agnostic, believing technology per se is becoming less relevant, with service being the element of the proposition that is growing in importance. In the past it meant a lot to be first with the 3G or HSDPA because it made a statement, but Uys says that has become less important, because there is the possibility that technology talk confuses customers about the benefits of one technology over another.

Vodacom operations

Source: Vodacom