Telkom-Cell C merger may unleash price war

Johannesburg - South African consumers might benefit from a price war in the mobile space should the acquisition of Cell C by Telkom happen as the new entity would have more muscle to battle Vodacom and MTN, analysts said yesterday.

This comes after Telkom issued a cautionary that it was in talks. Industry insiders said yesterday that the two parties were battling to agree on a price tag. Telkom is offering R18 billion while Cell C shareholders want a R22bn offer.

Cell C’s 75 percent shareholder, Dubai-based Oger Telecom, put the higher price-tag on the company, which includes R14bn of debt, according to a person familiar with the talks.

Telkom chairman Jabu Mabuza said last month that he saw an acquisition of Cell C as a possible way to expand the unit. Cell C chief executive Jose Dos Santos told Talk Radio 702 last week that the company had held talks with Telkom about a potential takeover.

“Once you have three bigger operators instead of two you are likely to see a war on price. The two big operators have been avoiding that this far, preferring to compete on products and innovation,” Africa Analysis managing director Dobek Pater said yesterday.

Telkom operates South Africa’s fourth-biggest cellphone provider and is seeking to grow the business to help offset declining sales at its larger fixed-line unit.

Cell C is the country’s number three wireless operator, behind market leaders Vodacom and MTN.

Industry insiders said the notice by Telkom to shareholders on the existence of talks was a positive sign that the fixed-line operator was confident that headway was being made in negotiations.

Mere formality

“The announcement could mean anything really. It could be that they are closer to agreement or a mere formality, but at least they have finally come up to tell the market,” said Spiwe Chireka, an independent consultant in the telecoms, media and technology industry.

Analysts said if any two small players in the industry could consolidate to give competition to the big two, then it would be the combination of Cell C and Telkom.

Telkom and Cell C have previously fought tooth and nail at the lower rung of the market, competing for the “soul of the consumer” with price cuts.

Cell C started stirring the market with aggressive price cuts when former Vodacom boss Alan Knott-Craig took the reins in 2012.

He ignited a price war that peaked in 2013 and tapered off last year, until December – when Cell C made the first move with a U-turn in which it hiked prices with what it called the “rationalisation of (its) products”.

In June, Telkom stayed its hand and did not raise contract pricing when the other three did so, earning itself the moniker of “consumer champion” once claimed by third operator Cell C.

‘Sit up and notice’

Pater said the combination of Telkom and Cell C, as it was not known whether it would be a merger or takeover, would definitely make the big two players “sit up and notice”.

He said the strength in the combination would come from the infrastructure capacity that the two firms held separately.

JM Busha analyst Farai Mupfinya said there were more competitive pressures that would be opened up by the new entity, price being just one of them. These he said also included quality, distribution capacity and customer service, pointing out that MTN in particular was vulnerable because it had been slack in developing its networks in recent times.

“If anyone would lose it would be MTN because they have under invested in their network. They have dropped the ball in the last two years or so and their focus on customer service is more in reaction to events,” he said.

Cell C spokeswoman Karin Fourie said: “We cannot comment as this is a shareholder matter.”

Telkom was a publicly traded firm and reported information when necessary, spokeswoman Jacqui O’Sullivan said. The local government owns roughly 40 percent of Telkom.

Telkom shares yesterday closed 0.81 percent down at R67, which valued the company at R35.3 billion.

* Additional reporting by Bloomberg

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