Vodacom to acquire stake in Vumatel and Vodafone Egypt

‘Vodafone Egypt has a 43% market share and a good high-margin business…so a very good opportunity for us to differentiate our geographical revenue’: Shameel Joosub – CEO, Vodacom.

SIMON BROWN: I’m chatting with Shameel Joosub, CEO of Vodacom. They announced two large deals today. Shameel, I appreciate the time. The first deal is you’re buying the Egyptian mobile operator from parent company Vodafone – a just over R40 billion deal. Egypt is a big market. I was doing some digging. It has a 100 million population, and the Egyptian operator is the dominant carrier in that market.

SHAMEEL JOOSUB: Very much so, Simon. It’s a really good acquisition for us and I think it’s a game changer in many respects; Vodafone Egypt has a 43% market share and it’s a good high-margin business as well. So a very good opportunity for us to differentiate our geographical revenue as well.

SIMON BROWN: How much is it now? I want to touch on banking in a moment, but in terms of the traditional sort of telco, voice, SMS data, how similar is it to the South African market in the sense that we’re actually a fairly mature market and kind of moving a lot more away from SMS, away from voice, and towards data?

SHAMEEL JOOSUB: It’s very much the same. I think 46% of its revenue now comes from data. So it’s very similar in a lot of characteristics to the South African market and therefore with high smartphone penetration, which of course gives you the opportunity to do things like super apps and these type of things as well. So very compelling in that respect, but also a big opportunity, every customer spending about 2.8 gigs per month. So, like South Africa, a big opportunity to grow that.

SIMON BROWN: The other point – and I alluded to it – is banking, digging into banking in Egypt. In South Africa we sit here with a very advanced banking system and the telcos are certainly operating in that space. Digging around in Egypt, it looks like their banking is less advanced and certainly a lot of Egyptians are not in the sort of traditional banking sphere, which I imagine is a huge opportunity for Vodacom and financial services.

SHAMEEL JOOSUB: Very much so, a big opportunity for us to either introduce the M-Pesa or the VodaPay platform into Egypt. We see that as one of the big synergies and big opportunities going forward. It’s a market where 80% of the market is unbanked, so a big opportunity. Vodafone Egypt has a leading market share in that respect so I think [it’s] a big opportunity to come in and introduce our full platform of services and so on – and leverage off the capabilities and experience that we’ve built.

SIMON BROWN: You mentioned super apps and maybe I misunderstand. My sense of a super app is kind of like Tencent in China, which people think is a messaging app. It is, but it is everything beyond that as well. I can order my taxi. I can buy things, I can sell things, I can play games within it. Is that part of that structure? It almost becomes the phone in a sense when the phone is online.

SHAMEEL JOOSUB: Very much so, Simon. You would have seen three weeks ago we launched the VodaPay super app – the Alipay app – in South Africa. It’s the first time that it’s been done outside Asia and is just a huge success, to be honest. It’s going really, really well. We’re very excited. It has 55 partners, downloads increasing every day exponentially. So it’s far exceeding our expectations and we are very, very happy with what we are achieving with the VodaPay super app that we launched three weeks ago.

SIMON BROWN: If we look broadly at Africa, obviously Vodacom started in South Africa, and your competitor MTN has been a lot more global. But Vodacom has been quietly taking bits of Africa. You’ve got East Africa, you’ve got north, you’ve obviously got south; you started here. Is it going to be equal or does South Africa remain very much the dominant market for you?

SHAMEEL JOOSUB: What this transaction does is it also diversifies our revenue dependency on South Africa to below 50%. So I think that’s transformational [in terms of] geographical expansion. So you’re not just dependent on one market.

I think what’s also encouraging is that it gives us access to 500 million people across our footprint, which is 40% of the GDP of Africa. We have fewer markets [with] well-capitalised market leadership in all our markets. I think it’s because we focus on fewer markets and make sure that we get the results. That’s the modus operandi that we’re deploying and I think Egypt gives us the opportunity to do that.

SIMON BROWN: Fewer markets, bigger markets – and dominant player in those markets.

Let’s move to the second deal you announced – buying into Vumatel and Dark Fibre Africa, DFA. A slightly more complex process here. Essentially you’ll be putting some of your fibre-to-the-home, fibre-to-business assets into a new business, InfraCo …. And with that you’ll also get Vumatel, the biggest fibre-to-the-home in South Africa, and Dark Fibre Web – very much cementing the back haul, but also client-facing in terms of fibre-to-the-home within South Africa.

SHAMEEL JOOSUB: It very much speaks to our purpose, and our purpose is to connect people. Essentially I think we’ve been under-indexing on the fibre part. Therefore we decided to buy into Vumatel, a premium vehicle of fibre in South Africa, and to contribute our assets and to grow that into a bigger vehicle. I think that all opens up the opportunity for fibre-to-the-home, and what we really like about is it also speaks to our transformation agenda which is the fibre reach and bringing fibre to the secondary towns and fibre to the townships. That becomes a big part of the play going forward. We’re putting our assets together with the Vumatel assets, and contributing capital will make sure that we can grow more fibre-to-the-home

Today there are 1.2 million homes passed out of about 2.5 million in South Africa, but there are 16 million households that still need fibre. I think it’s a big opportunity to grow going forward.

From a DFA perspective, fibre to the base stations, is going to be a big driver of 5G going forward and data being consumed over the mobile. So doing that in a shared infrastructure form we’ve been the anchor tenant for DFA for many years – almost from the beginning, actually. I think it just makes sense for us to contribute our assets as well, open access and, on a shared basis, using the open-access mechanism to look to build more fibre to the base stations, which will drive down the underlying cost to carry our data, which is a big, big focus area for us. And then of course, as you’re rolling out the fibre to the base station, that opens up opportunities to connect the businesses and also to empower Vumatel along the way and other fibre players as well.

SIMON BROWN: I get you on that as you’re going past them. If you live in an urban area, you’ve probably got access to fibre, which a large part of our country has not.

A last question. The Egypt acquisition is 80% shares, 20% cash. If I add in the R6 billion with the Vumatel/DFA deal, it’s about R14 billion. I checked your results for the end-of-March year end. You had almost R16 billion. Are you basically just going to write a cheque for it? You certainly don’t need debt.

SHAMEEL JOOSUB: We are currently carrying more debt on our balance sheet, about R26/27 billion of debt. Effectively what that gives us the opportunity to do now is by issuing shares, and with that we’ll also be consolidating about R21 billion of additional debt, including the debt that of course is still in Vodafone Egypt. So that will increase our debt on the two deals quite a bit. Over time we will seek to pay that down. But it will transform the growth of the company towards double-digit growth on a consistent basis. So we think it does change the profile of the company quite a bit going forward.

SIMON BROWN: I take the point on that. It transforms from a mature market in South Africa into a very different and huge prospective market in Egypt. We’ll leave it there. Shameel Joosub, CEO of Vodacom, I appreciate the time very much.

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