Implications Of A Telkom Mobile-Cell C Merger

2013 saw a flurry of claims and counter-claims of an imminent consolidation of the operations of South Africa's two smallest mobile network operators Cell C and Telkom Mobile (8ta), the mobile unit of fixed-line incumbent operator Telkom South Africa. While Cell C and Telkom have previously denied rumours of ongoing negotiation, BMI notes that recent comments by top executives of both companies, which reflect current market dynamics, suggests that some form of consolidation may be on the cards.

In November 2013, Telkom CEO, Sipho Maseko, disclosed that the operator was in talks with some parties over the future of its mobile business. Although details on the nature of the talks were sketchy, Maseko revealed that the outcome would likely result in lower capex and opex for the unit. In response to questions on Telkom's position, Cell C's acting CEO, Jose Dos Santos, opined that consolidation was inevitable in the market but quickly pointed out that any move by the operator would be decided by the shareholders. BMI notes that the comments by Maseko and Dos Santos reflect current market dynamics where Cell C and Telkom are struggling to break the dominance of entrenched players Vodacom and MTN, despite impressive financial and operational results in recent quarters.

Cell C recorded an impressive 33% increase in the number of subscriptions on its network in the 18 months to September 2013 to reach 12.3mn. However, this came at a fairly high cost as the performance was driven by aggressive tariff cuts in 2012 and 2013, which put enormous pressure on its existing network infrastructure and led to a deterioration of network quality. In July 2013, Cell C secured a ZAR5.7bn capital from majority shareholder Oger Telecom and financial institutions Nedbank and Development Bank of South Africa to fund network upgrades after the operator confirmed that the volume of voice traffic on its network doubled in the 12 months to March. BMI welcomed the move but noted that it was grossly insufficient to improve the operator's long-term competitiveness given Vodacom and MTN's capex in the South African market.

Challenging Big Two Requires Partnership
South Africa Mobile Operators By Market Share (%)

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This article is tagged to:
Sector: Telecommunications
Geography: South Africa

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