Vodacom margins under pressure

Johannesburg, 08 Aug 2006

South African cellular provider Vodacom is facing increased competition in African markets, 50%-owner Telkom said.

In a 448-page document, filed with the US Securities Exchange Commission, it said the increased competition in SA and other African countries might result in a reduction of Vodacom`s average tariffs. Competition could also trim its market share and result in increased customer acquisition and retention costs.

These factors, Telkom said, could cause "Vodacom`s growth rates, revenue and net profit to decline and its churn rates to increase". At the end of March, Vodacom estimated it held about 58% of the mobile market locally. In second place is MTN, with about 33% and Cell C reportedly has 9%.

"Increasing competition, together with the further liberalisation of the South African telecommunications industry, may result in a reduction in Vodacom`s overall average tariffs, loss of market share and increased customer acquisition and retention costs, which could cause Vodacom`s growth rates, revenue and net profit to decline."

Added to this, Telkom said the imminent implementation of mobile number portability and the Electronic Communications Act might result in increased competition, causing Vodacom`s churn rate to increase.

African options

On the continent, Telkom expressed concern over political, economic and regulatory changes that it says might result in a decline in revenue. Vodacom has investments in mobile communications network operators in Lesotho, Tanzania, Democratic Republic of Congo and Mozambique.

"These countries have political, economic, regulatory and legal systems that are still in the process of transformation and are less developed than those in SA. Political or economic upheaval or changes in laws and regulations or in their application may harm the operations of the companies in which Vodacom invests and impact the value of these investments."

In addition, Telkom said the regulatory environments under which Vodacom operates are often vague.

The possibility of further advancement into the continent is also limited, as the number of "available mobile operators and mobile licences and other acquisition and investment opportunities" is limited, it said.

While Vodacom is "seeking future growth opportunities from acquisitions of mobile operators or licences in other sub-Saharan African countries," exchange control regulations could limit an offshore investment.

Expansion is also hampered by a shareholder agreement with UK-based Vodafone, which controls the other half of Vodacom.