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Here’s why Internet Solutions wants Remgro’s asset

And why it’s, arguably, the most attractive fibre asset in the country…

Internet Solutions (IS) is, according to Bloomberg, in talks to buy Dark Fibre Africa (DFA) from Remgro, majority owner (51%) of DFA-parent Community Investment Ventures. The report last week suggested that the sellers want as much as R10 billion for the fibre network operator.

But why would Internet Soutions (owned by NTT unit Dimension Data) want to own a metro fibre network?

For a start, in a mobile-first, cloud-first world, high-speed fibre connectivity is gold. And the rush to blanket (and connect) as much of the world with fibre is this century’s goldrush. In South Africa, there are few networks that would rival DFA’s.

 

Fibre network

As at

Telkom SOC (Openserve)

147,000km

2014/2015

Neotel

16,000km (incl. 8,000km metro)

2016

Dark Fibre Africa

9,503km (mostly metro)

Sept 2016

FibreCo

>4,000km (mostly long-haul)

2016

Broadband Infraco SOC

14,661km

2016

Telkom (primarily via subsidiary Openserve) leads the way with somewhere north of 150 000 km of fibre in the ground (the most recent publicly-disclosed figure is more than two years old). Mobile operators, Vodacom and MTN, have decent fibre footprints in some metro areas, but these are likely in the low single digit thousands of kilometres in length (neither discloses this data).

On the face of it, Neotel’s network is impressive, but more than half of it comprises long-haul routes (mostly bought from Transtel). In metro areas, DFA’s footprint is more extensive. That said, Neotel’s network (and access to scarce wireless spectrum) was attractive enough for Vodacom to try buy it for R6.5 billion in 2014. The deal dragged on for two years and was eventually dropped by Vodacom, which cited regulatory hurdles (a massive alleged bribery scandal involving Neotel and Transnet certainly didn’t help).

It is important to note that DFA is primarily a wholesaler: it is a network provider to the other networks. And, in many ways, its metro footprint is the final piece in the puzzle Internet Solutions has been quietly assembling.

It is already a co-owner, along with Convergence Partners and Cell C, in FibreCo, which has built a 4 000km (mostly long-haul) network connecting Johannesburg, Bloemfontein, Cape Town, Port Elizabeth, East London and Durban. That gives it a national footprint.

IS is strong in the enterprise space and its unexpected move in December to buy MWEB from Naspers means it now owns one of the country’s largest consumer internet service providers too.

An acquisition of DFA means it would have few rivals, bar Telkom, in terms of scale (and telecoms is, of course, a scale game). In the past two years, DFA increased the size of its network by a fifth and will almost certainly cross the 10 000km mark this calendar year.

Dark Fibre Africa network

Mar-10

1 200km

Mar-11

2 600km

Mar-12

5 251km

Mar-13

7 340km

Mar-14

7 759km

Sep-14

7,910km

Mar-15

8 353km

Sep-15

8 839km

Mar-16

9 144km

Sep-16

9 503km

* Source: Remgro annual reports

Its networks in Gauteng (Johannesburg, Midrand, Centurion and Pretoria), Cape Town and Durban are industry leading and, in recent years, DFA has expanded into 21 smaller metros, including East London, Polokwane, Tlokwe (‘Potch’), Emalahleni, George and Pietermaritzburg.

DFA Gauteng 

DFA Cape Town 

DFA Durban 

Not only does DFA have an extensive network, it has a good business too. In the six months to September 2016 it reported revenue of R734 million, an increase of nearly 40% on the year prior. It will certainly exceed R1.5 billion for the full-year to March 2017.

Ebitda for the six months was R495 million (42.7% higher) and this will top R1 billion for the year. By definition, depreciation charges in a business such as this are high.

But, arguably, the most attractive part of this business is the fact that is has such a strong annuity revenue base. As at end-September, annuity income was R101 million per month (by comparison, in 2014 annuity income was R55 million per month!). It reported a future value of its current annuity contract base in excess of R18 billion in September.

Mobile data has been driving much of this demand for fibre since 2015, and as at September 2015, it had connected 7 878 base station sites for three of the four mobile operators (believed to be Vodacom, MTN and Cell C). In 2015, it said the “next growth drivers for DFA will be the enterprise market and the public sector, which have shown a definite increase in demand in the last twelve months”. It bought last mile build specialist Conduct Telecommunications in 2014 which helped it to “reduce the risk of … slow last mile rollout”. This enabled it to aggressively pursue the fibre to the business market. It is part of a consortium linking Gauteng government building and schools with fibre and also won a R200 million tender to roll out fibre for the City of Ekurhuleni.

The Bloomberg report, which cites three people familiar with the matter, says “the deal, which is still being negotiated, values Dark Fibre at as much as 10 times Ebitda”. That squares with the R1 billion Ebitda run-rate DFA is on, based on its H1 numbers. The book value of DFA’s network, as per Remgro, was R7.4 billion as at September 2016 (versus R4.6 billion two years prior).

One would imagine Vodacom and MTN have surely run the numbers and had a look at DFA. They’d both know this business very well (plus Vodacom parent Vodafone did a similar deal in the UK with the 2012 takeover of Cable & Wireless Worldwide). Is Internet Solutions the only realistic buyer? Thing is, there aren’t too many others who’d be able to afford an acquisition of this scale….

* Hilton Tarrant works at immedia. He can still be contacted at hilton@moneyweb.co.za. 

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