Cell C? 8ta da!

Speculation in recent weeks that Cell C and Telkom are in talks has got tongues wagging. Though suggestions that the country’s third mobile operator could merge with Telkom’s 8ta seem implausible, some sort of partnership, even a wide-ranging one, may make sense. By Duncan McLeod.

Cell C CEO Alan Knott-Craig told me in an interview about three weeks ago that SA’s telecommunications industry was “not sustainable” and that a wave of consolidation was coming, probably within the next six months.

That the former Vodacom boss, who took the reins at Cell C earlier this year, wants to shake up SA’s telecoms sector is clear. He wants to carve out a much bigger slice of the market for Cell C — up to 25% from 13% now — and he’s prepared to tear up the rule book to achieve his goal. So far, that’s meant slashing prices and removing the tariff complexities for which the industry is (in)famous.

His game plan is far bigger than just upending tariffs, though. When we spoke, Knott-Craig said he expected smaller telecoms players to reach out to one another in an effort to build scale to take on industry giants MTN and Vodacom. He specifically named Cell C, Neotel and Telkom, along with its mobile arm, 8ta, and hinted he was already involved in talks that could spur consolidation in the sector.

“Cell C, 8ta, Neotel and Telkom are four small players in the market — I separate 8ta and Telkom because I can — and they need scale,” he told me. “Who merges with whom? I don’t know. I think that will pan out as it pans out.”

How might this consolidation really happen? It’s an intriguing question.

Even if Telkom were able to muster government support to buy Cell C (far from a given), would the competition authorities allow it and, if they did, could the company afford to do the deal?

Looking at it the other way around, could Cell C raise the billions it would need to buy a stake in Telkom? Why would it want to buy into a troubled incumbent fixed-line operator and, again, would government, which has already sent Korea’s KT Corp packing this year, allow it?

Perhaps Cell C would be interested in buying (rescuing?) 8ta, leaving Telkom as a wire-line player only. The country’s newest mobile operator is hurting its parent financially — 8ta is “busy drowning Telkom”, in Knott-Craig’s words — but the fixed-line operator arguably can’t do without a mobile arm. Mobile is a key ingredient in its broadband strategy.

Though an equity transaction involving Cell C and Telkom/8ta appears unlikely (but not impossible), the opportunity for a closer working relationship makes sense. Of all of SA’s operators, Telkom has by far the largest fibre-optic backbone network, a valuable asset in wiring up base stations for fourth-generation (4G) mobile broadband technology. It also has access to a huge chunk of highly prized radio frequency spectrum that is well suited to 4G.

Cell C, on the other hand, has a retail and channel presence that 8ta has struggled to build. Though it’s not as strong as MTN and Vodacom in this regard, Cell C certainly has the people, processes and systems in place to support end users, an area where 8ta has come up short. Together, the companies have more base stations than Vodacom, an asset which, if leveraged properly, especially in combination with Telkom’s 4G spectrum assets, could give both parties a strong competitive advantage.

How the talks now taking place will reshape the industry is anyone’s guess. But that Knott-Craig wants to shake up the sector — and do it quickly — is now evident to everyone.

“There’s no time to do this organically anymore, ” he told me. “Everyone recognises the status quo is not sustainable.”  — (c) 2012 NewsCentral Media

• Duncan McLeod is editor of TechCentral; this column is also published in Financial Mail