Contracts drive sale of 'worthless' arivia

By Martin Czernowalow for arivia.kom
Johannesburg, 16 Mar 2007

The call for expressions of interest for state IT outsourcing company arivia.kom closed this week, and it is understood that 19 local companies have submitted documents.

However, industry sentiment is that the deal is really about securing two large outsourcing contracts, rather than buying a company, which is largely considered a badly-managed and underperforming entity in the outsourcing sector.

While stakeholders refuse to comment on the process, sources close to the deal say the sale is likely to be "hotly" contested, as companies such as IBM, GijimaAst, CSC, Tata and Accenture are said to be in the running.

Transnet and Eskom, which hold 41.5% and 58.5% of arivia, respectively, plan to shed their interest in the company by the end of the year. Sources claim government would like to finalise a shortlist of bidders by October, before moving to adjudication.

Meanwhile, speculation has been rife about the value of arivia, which has struggled financially in recent times, despite management's efforts to turn the company around. An operational restructuring exercise, completed in the latter part of last year, failed to improve arivia's financials.

Multimillion-rand contracts

Government appointed HSBC to conduct a due diligence report on the company, which is still pending. Since the start of the privatisation process, industry players have stated the company is "virtually worthless", but for two long-term outsourcing contracts with Eskom and Transnet that will be in place when the company is sold.

Sources say the five-year contracts are worth around R400 million and R200 million a year for Eskom and Transnet, respectively. However, the latter is expected to be boosted by the inclusion of services for the National Ports Authority, which, until now, have been provided in-house. It is expected that, upon privatisation, the combined value of the contracts will be about R900 million a year.

Despite Transnet and Eskom's expressed desire to see the company snapped up by a well-established tier one IT services group, it seems likely any potential buyer would strip the company and sell off its assets, while cashing in on the state contracts.

Big fight

Speaking at a recent analysts' briefing, GijimaAst financial director Carlos Ferriera said his company was in an acquisitive mood, quipping: "Take for instance current offerings. Transnet and Eskom's outsourcing contracts are up for grabs and, by the way, you get arivia.kom too. We are having a look at the proposal."

T-Systems SA CEO Mardia van der Walt-Korsten confirms the company submitted an expression of interest, and is approaching the acquisition from the point of view of securing an outsourcing deal. "We expect the sale to be a big fight among the major players. This is a very competitive space and the contracts are very attractive."

Indian industrial giant Tata is also said to be looking at arivia, by way of its Tata Consultancy Service division. Analysts believe a Tata bid for the parastatal would make sense, as this would provide an IT services partner for SA's second national operator, Neotel, in which Tata holds a 26.01% indirect stake. The Indian conglomerate also holds a direct 26% stake in broadband company Infraco.

The sale of arivia has been prompted by public enterprises minister Alec Erwin's push for parastatals to disinvest from non-core assets and focus on core competences. Ailing state defence group Denel has already withdrawn from the IT company.