British group wants 15% of Telkom`s pie

Johannesburg, 01 Nov 2002

The largely British consortium that yesterday submitted one of only two bids for the remaining 51% of the second national operator (SNO), due to take on Telkom next year, says it plans to take away at least 15% of the incumbent`s business.

Despite fears that there may be no takers for the stake, the two bidders, Goldleaf Trading and Optis Telecoms, yesterday both said they were confident they had submitted strong bids.

A third bid, believed to centre on a New Zealand company, failed to materialise by the revised 5pm deadline.

The successful bidder will combine with subsidiaries of Eskom and Transtel, which are to own a joint 30%, and empowerment company Nexus Connexion with 19%, to form the SNO.

Communications minister Ivy Matsepe-Casaburri yesterday confirmed the selection of Nexus as the preferred empowerment partner, leaving only the 51% shareholder to be selected before the new company can be formed.

The contenders

Although little detail is available about the two competing consortiums, and their business plans will only be opened to public scrutiny at a later date, Goldleaf has emerged as an early favourite.

Goldleaf is made up of the Premier Contracts Agency (PCA) which owns 44%, New York-based Telecom Africa International Corporation with 30% and Gateway Communications with 26%.

Both PCA and Gateway are based in Britain, although Gateway entered the South African market this year with the acquisition of value-added network services company FirstNet.

Competitor Optis is largely owned by private individuals from SA, including a significant stake by the Friedland family. Shanghai Telecom, a subsidiary of China Telecom, holds what the consortium describes as a small equity stake, with further equity set aside while it searches for more partners.

Goldleaf`s status as leading contender is largely due to three memorandums of understanding. One is with cellular operator MTN, which includes a deal to share infrastructure, the second is with technology company Siemens and the third with British Telecoms (BT).

PCA is largely made up of former BT executives and it maintains strong links with the company. The consortium says it has an agreement in place by which BT will provide "on-demand" management experience.

The consortium also benefits from the involvement of Gateway, which already operates elsewhere on the African continent as it has international interconnect agreements in place. The company apparently stepped in as the third player when MTN decided not to be directly involved in the SNO.

Telecom Africa, headed up by Joseph Okpaku, who is also chairman of the consortium, will be largely responsible for raising the necessary funding if the consortium wins the bid. It has strong links with the likes of the African Union and the Southern African Development Community.

However, Optis has the advantage of having Shanghai Telecom as a partner. According to the invitation to apply, by which the bids will be evaluated, applicants "must provide evidence that it, or at least one member of the consortium, has a customer base that exceeds 500 000 fixed-line subscribers".

The Goldleaf consortium does not have such a partner, although Gateway is active as a wholesaler of telecommunications services and members of PCA have previously controlled operators with more than two million lines.

SNO lite

If Goldleaf is selected as the preferred bidder it will have some surprises up its sleeve.

"I think it is safe to say that the business model will be a surprise, that our capex [capital expenditure] will be at a lower level than expected," says Okpaku.

He describes the business model as an "SNO Lite, as in lite beer", saying it will not take on Telkom at its own game and build a massive network, but concentrate on being the David in a David and Goliath scenario.

Yet he still believes the SNO can gain a 15% to 16% market share within 10 years "unless the incumbent shoots itself in the foot" in which case it could be substantially higher.

The SNO he envisages will focus on the profitable business sector and roll-out only necessary infrastructure, relying on partners such as MTN where possible.

"We bring an African technology to the table that is called polygamy," he quips.

"SNOs that have failed around the world were built on trying to outdo the incumbent, to outplay them at their own game," agrees Mike van den Bergh, head of the local Gateway operation. "We said we will build an SNO that is market-driven, able to be viable quickly and grow in line with market demand rather than building something huge and hoping customers come. The bankers and financiers are warm to that model."

Timeframe

It will be some time before the Independent Communications Authority of SA (ICASA) recommends a winner to Matsepe-Casaburri, but maybe not as long as originally anticipated. ICASA chairman Mandla Langa has committed the regulator to working through the holiday season on a "fast track" schedule to select its favourite bidder. A final timeline is to be announced next week.

Matsepe-Casaburri is also expected to approve of the selection quickly. Communications department director-general Andile Ngcaba would not comment on the three months it took the minister to accept the selection of Nexus, but said the ministry would also aim to conclude the process as quickly as possible.

Van den Bergh is the most optimistic of all. "We are hoping that they may make the announcement before Christmas," he says.