South Africa Telecommunications Report Q2 2008

In January 2008, it was reported that South Africa's fixed-line incumbent, Telkom had received an unsolicited takeover offer from the Saudi company Oger Telecom which, among its various telecoms holdings, holds a majority stake in South African mobile operator Cell C. In a statement, Telkom did not give details on the Oger offer and said it was not yet in discussions with the company. However, it said the management does plan to consider the approach as part of the company's review.

The news of a possible takeover deal between Telkom and Oger Telecom immediately prompted speculation that the UK's Vodafone Group could be handed another opportunity to increase its stake in South African mobile subsidiary Vodacom beyond the current level of 50%. The remaining 50% is held by Telkom, and it generally believed that Telkom would be required to offload its interest in Vodacom in order to clear the way for the deal with Oger, which already owns 75% of Vodacom rival, Cell C. Media reports have suggested that one of the reasons for Oger Telecom's interest in acquiring Telkom, is the Saudi company's desire to help Cell C gain faster and cheaper access to Telkom's fixed-line infrastructure - something which all of South Africa's cellphone operators continue to rely on.

Meanwhile, press reports have speculated about the possibility that a deal between Telkom and Oger Telecom could prompt a counter-bid from South Africa's second largest mobile operator, MTN, which previously pulled out of acquisition talks with Telkom. Even if MTN were to reopen acquisition talks with Telkom, BMI believes that Oger would end up being seen as the stronger of the two suitors, given its experience in running a large fixed-line business in Turkey.

Although Telkom continues to control South Africa's fixed-line infrastructure, the operator faces the prospect of increasing competition from companies that are currently deploying their own rival networks.

Second national operator Neotel already has an extensive national network with a dual 10Gbps core and currently offers backbone wholesale services to cellular operators, ISPs and other carriers. Neotel plans to start offering fixed-line and internet services to residential users in the early part of 2008. Meanwhile, in September 2007, MTN confirmed its plan to build a 5,000km national, fibre-optic network connecting major towns and cities. MTN has argued that although the business case for constructing its own network can be made on bandwidth needs alone, it also plans to resell access to its fibre network to corporate customers. MTN's fixed-line plans follow similar moves by mobile rival Vodacom. In October 2007, Vodacom began laying fibre-optic rings around South Africa's largest cities in anticipation of providing fixed-line services to corporate and residential customers. All of these developments will present Telkom with new challenges and have potential to radically transform South Africa's telecoms market.

Following the unveiling, in our previous update, of BMI's new business environment rankings for the African telecoms markets, South Africa continues to sit in second place after Nigeria, which is seen as offering greater opportunity for absolute mobile subscriber growth.