Nexus fortifies position while SNO hopes dwindle

By Phillip de Wet for ITWeb
Johannesburg, 24 Jan 2003

Nexus Connexion, the black empowerment group that is to hold 19% of SA`s second fixed-line telephone operator, is to start to cement its position even as the hope of finding a controlling 51% partner for the company diminishes.

<B>Deutsche pushes for management role in SNO</B>

As the likelihood increases that both bidders for a stake in the second national operator will be rejected, speculation is mounting that appointing a management partner is the best way forward. Deutsche Telekom has already stepped forward as a candidate.
Under this scenario Eskom`s Esi-Tel, Transtel and Nexus would retain their combined 49% stake and the balance would be warehoused to be sold at a later date.
This would open the door for an experienced interim management partner, such as Deutsche Telekom.
Business Day reports today that Deutsche Telekom directors will meet communications minister Ivy Matsepe-Casaburri next month to discuss options.
It says the German group will bid for a management deal in SA through its subsidiaries Detecon and T-Systems, offering managements skills, technical advice, infrastructure roll-out and marketing strategies.
Other contenders for such a role include British Telecom, which supports the Goldleaf bid, and Shanghai Telecom, a member of the Optis bid.
In a similar scenario, the Ghanaian government granted a three-year management deal to Norwegian operator Telenore to oversee Ghana Telecoms.

All eyes are still on the 51% selection process, which will today see the final filing of documents by competitors Goldleaf Trading and Optis Telecommunications before a decision on their fate is made. The Independent Communications Authority of SA (ICASA) is to make a recommendation on their suitability before the end of the month.

Yet in the background Nexus says it is well on track to achieve the conditions attached to its selection as the empowerment component.

ICASA last week said it was satisfied that Nexus would be able to raise up to R2 billion in cash if necessary and would go ahead to put 40% of its consortium out on a retail offer to broaden its empowerment base.

Nexus head Kennedy Memani says the Industrial Development Corporation (IDC) "came to the party" with support after long discussions. However, Nexus seems plagued by the same trouble claimed by Goldleaf and Optis: the offer of support is conditional.

"We didn`t have to put up a bank guarantee, but if there is a good business plan on the table and a good business behind it, there won`t be a problem on their [the IDC] side," Memani says.

ICASA has grilled both Goldleaf and Optis on their statements that it would be impossible for a financial institution to commit itself to billions of rands in funding before the second national operator (SNO) is established and has a consolidated business plan. While the regulator has seemed loath to accept this at face value, it says Nexus has adequately shown it can raise cash when required.

The other condition on the recommendation of Nexus, that existing shareholders dilute their stake, is still some way from being fully achieved. Memani says the group is putting together a prospectus before going to market. Exactly who will be targeted with a sales pitch is not yet clear.

"We have not discussed the logistics of the offer; we can do it either in a targeted way or by public invitation," he says. "It is always better and more cost-efficient to do it in a targeted way, but it might be a combination of the two."

New investors must be acceptable to ICASA as empowerment entities. Memani has expressed interest in involving the groups that made up the competition to Nexus in its bid for the 19% stake in the dilution. Doing so would both present it with a ready pool of investors and avoid the total fragmentation of the consortium by taking on many individual shareholders.

A wedding without a bridegroom

While complying with the conditions, Nexus also plans to shortly start formal integration talks with state enterprises Esi-Tel and Transtel, which are to hold a combined 30% of the SNO. Both companies have expressed severe reservations about the quality of both Goldleaf and Optis, and Nexus has joined them in calling for a licence to be issued to the existing partners if ICASA finds neither suitable.

"I have been consistent in my comments from the start," says Memani. "The two bidders are not what we anticipated when the whole international ITA [invitation to apply] process was designed. The bids are not there."

Goldleaf and Optis today have their final chance to defend their bids when they file their responses to a damning consultant`s report prepared for ICASA. Few believe either will be able to convince the regulator that they have complied with the legal requirements set to them and it is expected that ICASA will find neither acceptable.

Should this happen, Memani believes an operator`s licence could be issued to the combined Esi-Tel, Transtel and Nexus within a matter of months, with the remaining 51% of the company put on ice until a suitable controlling party is found. He is confident this can be done.

"The telecoms markets are beginning to go up again and the opportunities are getting better, even though we are still at the bottom of the cycle," he says of the chances of attracting a foreign partner.

But Goldleaf is among those that believe issuing a licence to a partially assembled SNO would require an amendment to telecommunications legislation. This could delay the process by a year or more while Telkom continues to entrench its monopoly position.

ICASA has committed to making a recommendation on the 51% bidders to communications minister Ivy Matsepe-Casaburri by 31 January.