May 19 (Bloomberg) -- Vodacom Group Ltd., the wireless operator with the most South African customers, agreed to buy local Internet provider Neotel Pty Ltd. from India’s Tata Communications Ltd. to boost its data offering.
The 7 billion-rand ($675 million) transaction will be funded through cash and existing credit facilities, Johannesburg-based Vodacom said in a statement today. The deal is subject to regulatory approval and the companies will start working on that process immediately, Mumbai-based Tata said in a separate statement.
Vodacom is increasingly focused on small- to medium-sized business customers and expanding Internet and data services to offset declining revenue from its domestic voice division. Neotel’s spectrum would help Vodacom add Internet users as it competes against South Africa’s biggest fixed-line operator Telkom SA SOC Ltd. and MTN Group Ltd., Africa’s largest mobile-phone company.
“This is good news for competition in both the consumer and enterprise sectors,” Vodacom Chief Financial Officer Ivan Dittrich told reporters on a conference call today. “On the consumer side the combined entity will be a stronger fixed player and will be able to offer a wider range of services. It will also help us to accelerate the provision of services like fiber to the home.”
Vodacom has been in exclusive talks with Tata over Neotel since September, and issues relating to the deal weren’t resolved until yesterday, Chief Executive Officer Shameel Joosub said on the call. The company won’t have to take on Neotel’s debt as part of the acquisition, while the next step would be to gain clearance for change of ownership from the Independent Communications Authority of South Africa and the Competition Commission, Joosub said.
“We are applying for a transfer of ownership, not a transfer of spectrum,” he said. “We plan to keep Neotel as a stand alone company.” The deal will probably be completed by the end of March 2015.
Vodacom shares fell 1.9 percent to 126.52 rand at the close in Johannesburg. Tata Communications soared as much as 7.6 percent, the most since Feb. 6, and was 3.4 percent higher at 304.40 rupees at the market close in Mumbai.
Mobile operators around the world are turning to fixed-line assets that allow them to sell a wider range of services and carry data traffic more efficiently. Vodacom’s parent, Newbury, England-based Vodafone Group Plc, last year bid for Kabel Deutschland, a German fixed-line telephony, cable TV and Internet-access service provider.
MTN may yet try to intervene in Vodacom’s bid for Neotel. Zunaid Bulbulia, CEO of Johannesburg-based MTN South Africa, told reporters on March 5 that the company has “a number of options” available if Vodacom’s deal includes Neotel’s spectrum, without giving further detail.
“We do not comment on specific competitor transactions but we look favorably to the continuous development of the telecoms landscape in South Africa which is essential for the long-term sustainability of the industry,” Bulbulia said in e-mailed comments today.
Vodacom full-year net income increased 1.9 percent to 13.2 billion rand as data usage and a rise in international customer numbers offset a fall in domestic voice revenue, it also said today. The number of active subscribers rose 14 percent to 57.5 million as the company increased its presence in South Africa and elsewhere on the continent.
The company is expanding in countries such as Mozambique and Democratic Republic of Congo as the South African market becomes saturated. In a separate deal, Paris-based Orange SA said it sold a majority stake in its Uganda unit to closely held Africell for an undisclosed amount.
Vodacom plans capital spending of 13 billion rand in the 12 months to March 2015, up 20 percent on last year. About 9 billion rand will be spent on expanding data coverage to all areas in South Africa where it has voice services, and building more 4G sites and fiber. In international markets, the cash will be spent on low-cost sites in rural areas, particularly in the Congo.
Investment bank Rothschild advised Vodacom on the Neotel deal and Standard Chartered Plc worked with Tata. Rand Merchant Bank also worked on the deal.
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