Vodacom’s eastern pivot

Faced with a heavily saturated domestic market, hamstrung by an anaemic economy, Vodacom is turning its attention to business outside South Africa’s borders. Its glowing red logo has long shone like a beacon over downtown Johannesburg from a giant advertisement atop Ponte City, the tallest residential building in sub-Saharan Africa.

With more subscribers than any other mobile operator in South Africa, the firm is dominant on its home turf – perhaps too dominant, according to the country’s competition commission, which on 4 October announced an investigation into Vodacom’s exclusive contract to provide services to the government.

The company sees dynamic, fast-growing East Africa as a lynchpin of its growth strategy. In August, Vodacom Group wrapped up its R34.6bn ($2.6bn) acquisition of a 35% stake in Safaricom, the leading communications firm and mobile operator in Kenya, from parent company Vodafone.

The deal took the form of an equity swap, with Vodacom issuing 226.8m new shares to UK-based Vodafone, which is seeking to divest from African companies in order to look for a tie-up in Europe. Under the terms of the deal, Vodafone will retain a 5% holding in Safaricom, while the Kenyan government will keep a 35% stake.

A formidable player

The transaction, described by Vodacom as “transformational,” was the largest in the company’s history. “It provides us with a unique opportunity to diversify [Vodacom’s] financial profile in a single transaction,” Vodacom chief executive Shameel Joosub tells The Africa Report.

Joosub points to Safaricom’s successes in Kenya, where it has a market share of 71%. “This is an exciting deal,” he says. “It provides our shareholders with access to a high growth, high margin and high cash-generating business in the attractive Kenyan market.” He adds: “It will also increase our presence in East Africa and make Vodacom a formidable player in financial services on the continent.”

Kenya also offers room for expansion, Joosub says, noting that the country has a mobile penetration rate of 88% – well below that of South Africa, at 146%. Dobek Pater, a telecoms expert and managing director of the Africa Analysis consultancy, says Vodacom is looking to solidify its position in Africa against competitors such as MTN Group.

While Vodacom is South Africa’s biggest mobile carrier with 39.4 million subscribers, it lags far behind South Africa-based MTN in terms of subscriber numbers across the continent. MTN has 231.8 million African subscribers, far more than Vodacom’s 69.3 million.

The Kenyan market is expanding, and is suffering growing pains. “Safaricom is a very successful entity with good revenue generation, profitability and cash flow. Vodacom stands to benefit from that,” Africa Analysis’s Pater says.

But just as Vodacom is in the regulator’s spotlight for its dominance in South Africa, the Communications Authority of Kenya commissioned a report this year that suggested Safaricom should be broken up because it has too much control of the market. The government has come to Safaricom’s defence, but the company has become a target of opposition criticisms after the contested August presidential election.

‘Playing catch-up’

Unlike rival MTN, which has aggressively pursued new markets – notably, Nigeria – Vodacom has taken a more cautious approach. Joosub cites Vodacom’s “discipline” in evaluating new markets when asked where the company might be looking to expand next.

He has previously stated that Vodacom is only interested in acquiring significant players in markets of scale on the continent. Derrick Chikanga, a telecoms analyst at research group IDC, says: “They are really playing catch-up in terms of expanding their operations outside South Africa.”

Vodacom also hopes its Kenyan acquisition will help drive growth of M-Pesa, Safaricom’s signature mobile-money service that launched a decade ago and now has 19 million active users across the continent.

The major exception to this success is South Africa, where M-Pesa was shuttered last year after poor uptake from consumers. “The conditions in the local [South African] market are different, from a regulatory and market development perspective – both in the financial sector and the mobile sector,” Pater explains.

Pater says Vodacom will likely try to replicate the success of Safaricom’s mobile-money platform in new markets as mobile money and financial services become increasingly important for African wireless operators to have in their portfolio.

Tanzanian IPO

Vodacom’s pivot to East Africa also bolsters the company’s position in Tanzania, where it owns a 65% stake in Vodacom Tanzania and has 12 million customers. Vodacom Tanzania had its initial public offering (IPO) in August after the Tanzanian government ordered all telecoms companies operating in the country to sell at least a 25% stake on the Dar es Salaam Stock Exchange in a bid to boost domestic ownership in the fast-growing sector.

Initially undersubscribed, the IPO was extended to allow prospective investors more time to participate. Vodacom Tanzania was the first telecoms operator to list on the exchange and became its largest IPO to date, drawing some 40,000 local investors.

Many of them were first-time participants in the country’s stock market. Pater says the fact that the telecoms IPOs were forced, not voluntary, may have led to reticence on the part of investors. “I think in general there is a cautious approach towards those information and communication technology stocks, perhaps in juxtaposition to mining stocks that probably present a better option at this time for investment,” he says.

Back home in South Africa, there are concerns that telecoms companies will be increasingly affected by the country’s grinding economic woes under President Jacob Zuma’s government. Vodacom, as with other South African firms, has been hurt by the volatile currency, and there are concerns that should local debt be downgraded to junk status, borrowing costs will rise.

Consumer spending is also expected to take a hit. Telecoms firms including Vodacom have faced declines in revenue from mobile voice services. While data services have been profitable, growing public pressure to reduce prices have added to their woes.

Replacing lost revenue

Vodacom says it has lowered prices through better-value data bundles but admits that more needs to be done to lower voice and data costs. “We embarked on a pricing transformation strategy three years ago and as a result, our customers have benefited from a 44% reduction in data prices and a 42% decline in the cost of voice calls over that period,” Joosub says.

“We need to expand 4G coverage still further and keep pace with an increase of more than 45% in sustained data traffic demand,” he adds. “Both of these come at a cost, and we have invested some R32.7bn over the last four years.

However, lack of access to spectrum is hampering our ability to drive down infrastructure costs and in turn, enable us to pass savings to the consumer.” Africa Analysis’s Pater says wireless operators want to ensure that data revenue replaces lost revenue from voice services. “From an operator perspective, you would want to sustain data prices higher rather than lower in order to realise a quick return on investment and maintain higher revenues,” he says.

“It’s not cheap to provide data services,” Pater adds. “Significant funds and capital expenditure are committed to build infrastructure.” IDC’s Chikanga adds: “The telecommunications industry is becoming very, very competitive […] A lot of the operators are under pressure in terms of margins due to the decline in revenues from voice. They see that data is the only area that’s going to generate revenue for them.

Reducing that would be suicide for their operations.” He concludes: “It’s all about broadening your operations [..] It’s in [Vodacom’s] interest that they expand, especially within the East Africa region.”

From the November 2017 print edition