Comp Comm passes MTN, Verizon deal

By Candice Jones, ITWeb online telecoms editor

Johannesburg, 28 Oct 2008

Despite considerable complaints from competitors, MTN's proposed acquisition of 100% of Verizon Business has passed Competition Commission scrutiny.

The commission announced yesterday that the speculated R1.4 billion deal is to be passed to the Competition Tribunal with unconditional approval from the authority. MTN snapped up the Internet service provider (ISP) in June, beating Allied Technologies (Altech) to the punch.

After a dramatic few weeks on the Johannesburg Securities Exchange, MTN has lost significant market capitalisation and the deal is now worth 0.9% of its R155 billion cap. This is in comparison to its cap in June at R227.57 billion, which put the deal at 0.6%.

According to Tembinkosi Bonakele of mergers and acquisitions at the commission, significant comment was received from competitors in the industry. Internet Solutions (IS) confirmed it had submitted its concerns to the authority.

There has been speculation that Altech is strongly contesting the matter; however, CEO Craig Venter was unavailable to comment at the time of publication.

“Even with these concerns, we did not see any substantial reason why the merger should not go ahead,” says Bonakele. He adds that the market share of the merged entities would not reach a market share of 20% in the vertical markets in which the merged company will play.

Competitor concerns

According to Bonakele, one of the primary concerns was the lack of competition in the space. However, he adds that Verizon will exit the market, leaving space for a competitor, which the commission believes will be filled by the merger between MTN and Verizon.

Another concern expressed, by competitor IS, is that MTN has already shown market dominance in one telecommunications space. “They have been dominating costs in terms of interconnect fees and have significant sway on mobile data rates,” says IS CEO Angus MacRobert.

IS is worried the same tactics will be brought into the ISP market. The company is also uneasy about the fact that MTN has already been converted to a class ECNS licence, which allows the company to self-provide, a much coveted slip of paper for value-added network providers like IS.

“If this legal issue with Altech had not gone through, we may have been converted to ECNS already. It is concerning that at the moment we cannot self-provide, while MTN gets bigger.”

While IS has submitted its concerns, it is not actively contesting the merger. “We have bigger battles to fight at the moment. We have done what we can do and besides you can't oppose every acquisition.”

Competition gaps

Sources close to the commission say that despite the issues raised, there will definitely be competition in the ISP market after MTN and Verizon have joined hands. The source says this may be because of, or even in spite of, the current legal battle between Altech, the Independent Communications Authority of SA and the Department of Communications over the right to self-provide.

An MTN and Verizon merger would place them in five basic markets, including networking, which involves both IP networks and multi-protocol layer switching; hosting services, or managed services; wholesale Internet connectivity; voice over IP provision; as well as the possibility to provide end-to-end leased lines.

According to MacRobert, in the mentioned five verticals combined, IS has roughly 25% of the market share. “None of us who play in that space have a large market share,” he adds.

High expectations

MTN has said the transaction is in line with its strategy to provide integrated communications solutions in all of its markets. The deal also follows similar acquisitions by the company in Nigeria, Cameroon, Cyprus and Cote d'Ivoire.

While the company's SA MD Tim Lowry did expect the deal to be contested by competitors, he did not anticipate any trouble from the Competition Commission. At the announcement of the merger, he said the company would not engage in a deal that it did not believe would be successful.

MTN sent out a formal statement this morning saying: “MTN notes that the Competition Commission has referred the matter to the Competition Tribunal. It is expected that the tribunal will set down a pre-hearing within the next two weeks. MTN will keep its stakeholders informed of the outcome of the processes as they become available.”

Market shake-up

The merger between MTN and Verizon Business is also expected to shake up the local telecommunications market.

In an earlier interview, Irnest Kaplan, head of Kaplan Equity Analysts, said a merger between the companies would be significant for the local industry. “In the fixed-line space there are really a few dominating players, Telkom and now Neotel, with smaller players springing up with alternatives to fixed voice offerings.”

He added that the most prominent alternative players include IS and Vox Telecoms. “A merger between MTN and Verizon Business will make it harder for alternative players to spring up in the market.”

According to Kaplan, in order to succeed in the alternative voice space, companies need a customer base, and experience in voice and data. “Verizon would bring the data experience and a customer base, while MTN would provide the voice experience.”

He said when the Verizon deal does go through, the impact on MTN will be small. “While Verizon is a significant ISP, second or third largest in the country, MTN's dealings are across Africa.”