The country’s fourth mobile service operator, Cell C, has called on regulators to assess carefully the proposed purchase by MTN of Telkom to ensure it does not reduce competition in the infrastructure market and that smaller operators can compete.
Last week, MTN and Telkom announced they were in talks but the process was still at an early stage.
Cell C’s CEO Douglas Craigie Stevenson said the proposed deal should be seen in the context of a changing telecom industry faced with complex market dynamics.
“The old, simplistic structure of the telco market has been split into two, with developers of telco infrastructure on one hand and buyers of infrastructure on the other.
“It will be necessary for regulators to assess carefully whether the proposed merger does not lessen competition in this new market structure and that smaller operators like Cell C can continue to effectively compete as a buyer of infrastructure services,” he said.
Craigie Stevenson said there was a range of pro-competitive measures to consider, including wholesale regulations to ensure that smaller operators can access infrastructure services at competitive prices.
Dobek Pater, director for business development at Africa Analysis, said it makes sense that there are fewer operators with more extensive infrastructure as infrastructure-based services are commoditised.
“So ultimately we may see fewer large infrastructure players in SA. This may make their operations more efficient, viable and sustainable. What is important is to ensure that a competitive environment remains at the infrastructure layers and that it services the retail services provision market well,” he said.
Apart from the proposed MTN and Telkom deal, Vodacom is in the process of merging its fibre network infrastructure with that of Vumatel and Dark Fibre Africa to create one of the largest fibre network operators in SA.
These two deals, if successful, will strengthen both MTN's and Vodacom's positions in the market and could make the competitive landscape even more challenging for their struggling rivals such as Cell C.
For years Cell C, which is 45% owned by JSE-listed Blue Label Telecoms, has been weighed down by its multibillion-rand debt, which forced it to exit the capital-intensive infrastructure market and rely on rivals' networks for roaming.
This move helped the company reduce operating costs. Its prepaid customers are running on MTN’s network while those on contract use Vodacom.
What remains is the core network — basically the intelligence about customer databases, how to route calls, applications and prepaid bundles, Marungwana said.
It will be necessary for regulators to assess carefully whether the proposed merger does not lessen competition in this new market structure and that smaller operators like Cell C can continue to effectively compete as a buyer of infrastructure services
— Cell C’s CEO Douglas Craigie Stevenson
Cell C is in discussions to restructure its R7.4bn debt with the complex process likely to be completed in the coming weeks.
If this business model is a success and the balance sheet is sufficiently capitalised, it is possible that it can survive for at least another couple of years, said Peter Takaendesa, fund manager at Mergence. The future of Cell C depended in part on whether its roaming partners would continue to provide profitable terms to the company.
David Rossouw, equity analyst at FairTree Asset Managers, said roaming on other networks may compromise Cell C's service and it may become less competitive because it does not control its network quality.
Telcos are capital intensive and need to invest to remain relevant, he said.
Since inception, Cell C, which has around 13-million subscribers, has struggled to cement itself as a strong competitor and was recently overtaken by Telkom as the third-largest mobile operator.
To secure other revenue streams, it opened its platform to companies that want to play in the mobile space but do not have infrastructure — referred to as mobile virtual network operators (MVNO).
This has enabled the likes of Standard Bank, FNB and Mr Price to sell their own sim cards used for voice and data.
Farai Mapfinya, CEO and chief investment officer at Aequalis Asset Managers, said Cell C faces a massive challenge “and we do not see how they'll make [it] work without a tie-up of some sort”.
Cell C’s debt
— IN NUMBERS: R7.4bn
“We've always proposed the business be sold for a small notional value of say R1 to one of the bigger players. We thought perhaps Telkom could be a suitor and consolidate to a strong three-player industry — but that ship is sailing away fast.”
Asked if Cell C, once it concludes its debt restructuring, will consider a merger or joint ventures with other companies, Craigie Stevenson said Cell C’s “transformation to a technology company is based on creating ecosystems that the company can lead in and collaborate with partners to offer lifestyle products and services. Cell C already partners world-class MVNOs and pioneered this model in SA”.
Analysts say a merger or acquisitions could boost Cell C’s competitiveness.
To remain relevant, and leverage the intellectual property and the value they still have, Marungwana said Cell C should among other things, consider moving customers to someone else’s radio access network infrastructure, transition into cloud computing platforms and consider a merger or partnership with another telecoms or financial services company.
“Then they could do a lot of innovative services when you combine financial services with mobile services”, he said.
“Cell C has a customer base, a lot of brand value and they had a very good customer-acquisition strategy, in terms of market targeting. There's still a lot of goodness in Cell C. And the biggest one is the spectrum that they hold because any of these guys will still be attracted to it,” Marungwana said.
Rossouw said Cell C's spectrum has value for other operators, who can use it in a reverse-roaming manner. “The other operators want Cell C to survive, since it means less regulatory scrutiny,” he said.
Takaendesa says if Cell C’s shareholders can find a buyer at a reasonable valuation then “I think it is better to exit, given how the competitive environment is shifting”.
“The best time to sell was actually a few years ago when there was a tight market for licensed spectrum in SA and Cell C was still in a decent number three position in the mobile market.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.