Africa is not for sissies and SA's telecoms latecomers

SA telecommunications companies are burning their fingers in Africa because of hasty expansion decisions made in their rush to catch up with MTN, analysts said this week as Vodacom announced a further R1.5-billion write-off of its pan-African business, Gateway.

Gateway, which provides satellite, business and interconnect services to companies across the continent, was bought for $700-million in August 2008, days before Lehman Brothers filed for bankruptcy protection and triggered the global financial crisis. In 2009, Vodacom wrote off R3-billion on Gateway. The book value of the investment is now $72-million.

"Is this the end of the Gateway impairments? I hope so - there isn't much left to impair," Pieter Uys, Vodacom CEO, said this week.

While the international carrier business triggered the first impairment due to the impact of the financial crisis on traffic volumes and tariffs, the main culprit for this year's write-off is Gateway's Vodacom Business Africa in Nigeria, where the extremely competitive market forced large discounts to customers.

Uys said Vodacom was "no longer really interested" in the carrier part of Gateway's business, and may sell it in future. However, the Vodacom Business Africa part of Gateway, of which Nigeria makes up about 50%, still offered potential, he said. Gateway suffered an operating loss of R1.8-billion in the past financial year.

After nine years Vodacom, with mobile operations in five African countries, has yet to earn an operating profit in Mozambique and the Democratic Republic of the Congo. Its operation in Lesotho, with a population of two million, is the most successful venture outside SA, with operating profit of R245-million, compared with SA's R15.5-billion.

Vodacom is not the only local player struggling to get returns on expensive African expansion. After buying Nigeria's minor mobile operator Multi-Links in 2007, Telkom wrote off nearly R7-billion before announcing the sale of the mobile arm earlier this year.

Like Vodacom, Telkom believes it can still make money from corporate Nigeria, and opted to hang on to Multi-Links' fixed-line transmission network, which accounted for 10% of the company's revenue.

Telkom backtracked on its grand plans to build a comprehensive city-to-city network in 32 countries for iWayAfrica, saying last year it would rather focus on serving SA corporate customers in key markets, mainly Nigeria, Zimbabwe, Namibia and Kenya. TMS, its consultancy business started to help other operators expand in Africa, was canned.

Altech has had a tough time with its investment in East Africa. While it was expected to contribute 45% to Altech's operating profit by 2012, its operating profit dropped to R32-million from R196-million, or 4%, in the past financial year, mainly due to cutthroat competition in Kenya.

Dobek Pater, partner at Africa Analysis, said local operators were under pressure to expand into Africa, particularly because of the growth and returns earned by MTN. However, operators did not necessarily take the time to properly understand the markets they were entering and often overpaid for assets, he said.

Also, markets have changed over the past few years, forcing operators to re-think, said Pater.