Letter from... South Africa

Kirsty Laschinger reports on the 'year of the FDI' in South Africa

Last year was a watershed one for South Africa from a foreign direct investment (FDI) perspective. In July, Barclays completed its acquisition of a majority stake in Absa, the country’s largest retail bank by assets. On 3 November, another UK-domiciled global giant - Vodafone - announced that it intended to bid for one of South Africa’s premier assets in the country’s second-largest ever FDI deal (after Barclays’ acquisition of Absa).

Vodafone has indicated that it will make an offer for Venfin, the South African-listed investing holding company controlled by the Rupert Family’s Rembrandt Trust. The ultimate target is not Venfin’s entire portfolio, but its 15% in the country’s largest - and Africa’s second biggest - cellular operator, Vodacom. This offer values Vodacom at R15.6bn (£1.4bn). Venfin’s remaining assets, including stakes in IT companies Dimension Data and Frontrange and independent free-to-air television station e.tv, will be spun off into a separate unlisted Newco which has been tentatively valued at R5bn (£0.45bn).

Vodacom claims 57% South African market share and reported revenues of R16.2bn (£1.5bn) in the six months to September 2005. At the end of September it had 15.8m South African subscribers, augmented by a further 3.3m in four other African countries south of the equator.

Vodafone already owns 35% of Vodacom, but it had to structure a deal to acquire Venfin, rather than buy the Vodacom stake directly from the group in order to sidestep the pre-emptive option held by state-owned fixed line operator Telkom, which owns the other 50% of Vodacom.

Steve Minnaar, head of industrial research at Old Mutual Asset Management, says that the price offered by Vodafone is good and includes a “strategic premium”. It is difficult - though not impossible using optimistic assumptions - for South African investors to justify the same value. However, Minnaar says that Vodafone’s lower cost of capital means that the global group will be able to make the investment work, similarly to MTC’s recent acquisition of smaller pan-African cellular operator Celtel.

Ben Padovan, Vodafone’s deputy head of group media relations, says that Vodacom gives Vodafone “increased exposure to the attractive and growing South African market”. Padovan points out that the move is exactly in line with Vodafone’s strategy of increasing investment in emerging markets. In 2005, Vodafone invested in India (through 10% in Bharti Tele-Ventures, India’s largest cellular operator, worth US$1.5bn) and acquired businesses in Romania and the Czech Republic. At the same time, it has sold Vodafone Sweden to Norwegian telecoms incumbent Telenor.

Minnaar describes Africa as “the last frontier” for cellphone subscriber growth globally and believes this is the key attraction for Vodafone, which faces slowing subscriber growth in western Europe. In addition, Vodacom has a role to play in knowledge-sharing across the wider Vodafone group.

However, it’s not all one-way traffic. Vodafone has historically added to Vodacom’s proposition and this looks likely to continue in areas such as capital equipment and handset procurement and research and development.

Minnaar argues that a long term view sees telephony becoming a commodity, and so it will become important to cut costs to the bone by working on efficiencies. In this regard, it helps to be part of a larger group.

But, arguably, the most important outcome of the deal for Vodacom could be the eventual relaxation by Vodafone of its geographic restrictions on Vodacom’s African expansion. In terms of the current shareholder’s agreement, Vodacom can only operate in African countries in the southern hemisphere unless it receives Vodafone approval (as in its aborted entry into Nigeria).

Padovan says the deal is likely to close in the first quarter of 2006, subject to South African competition and other regulatory approvals.

Kirsty Laschinger is a freelance writer for a number of South African publications and is a chartered financial analyst.