Gateway Vodacom's 'platform'
But merger trashes profit
November 10, 2009
By Thabiso Mochiko
To view a graph of Vodacom's share price from August 3 to November 9 - click here
Vodacom will merge part of the Gateway Communications operations with its Vodacom Business subsidiary as part of its plan to make it profitable.
Vodacom paid R5 billion a year ago to buy Gateway Communications, which provides voice and infrastructure networks such as satellite and fibre-optics in Nigeria, among other countries.
Gateway, which contributed revenues of R1.3bn, reported poor trading performance as a result of a reduction in cellphone traffic as operators in the rest of Africa cut prices in the six months to September.
Its performance knocked Vodacom's earnings a share as it was forced to write off R3.2bn. Earnings a share dropped 98.4 percent to 4c.
"There is still growth potential in markets where Gateway operates, especially in Nigeria. Gateway is Vodacom's platform into Africa," said group chief executive Pieter Uys.
Vodacom's international traffic would be transferred to Gateway, he added.
Vodacom expected Gateway's profitability to remain under pressure.
Zandisile Mabuya of Legae Securities said it made no sense for Vodacom to buy Gateway, which had an earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 9 percent, while its group Ebitda margin was 33 percent.
"Vodacom was after growth at all costs and maybe that's why it bought Gateway, which is margin dilutive," Mabuya said.
Uys said there had been no signs of a potential decline in business for telecoms companies in Africa when Vodacom bought Gateway.
Frost & Sullivan's Spiwe Chireka said the overall spend by telecoms providers in Africa fell during the downturn, and firms that played in the wholesale segment were hit by this.
Vodacom's headline earnings a share declined by 12.4 percent to R2.19. Net profit plummeted to R59 million from R3.7bn the previous period. It was also hit by a deferred tax reversal of R551m in the Democratic Republic of Congo.
Group revenue rose 9.9 percent to R28.7bn on the back of a 16.5 percent increase in total mobile customers to 41.6 million. Vodacom added 579 000 new cellular customers in South Africa to 28.2 million.
Vodacom and its competitors are under pressure to reduce mobile termination rates in South Africa, which are at R1.25 a minute. Vodacom estimates R200m in losses for every 10 percent reduction in the termination rate.
It gained R1bn mainly from Telkom and at the same time paid out R3.1bn to competitors.
Uys said mobile termination rates would come down, but "the question is how quick and at what rate". He added that the expected losses could also depend on the traffic volumes from fixed-line to mobile.
Mabuya said Vodacom made all of its net interconnection revenue from calls terminated for Telkom. A reduction in the rate charged to Telkom would see Vodacom lose about R2bn a year, and this would trickle down to earnings as all other costs would remain the same.
"Vodacom's nonchalance is worrying because a R2bn reduction in earnings will most likely slash normalised earnings by what I estimate to be 33 percent," he said.
"I'm not really impressed with Vodacom or convinced of its growth prospects. Vodacom is heavily exposed to South Africa, which is saturated. Its portfolio of global operations is mediocre. The rate of broadband growth is slowing... I don't see where the growth is going to come from," he said.
Vodacom shares shed 0.69 percent to close at R52.02 on the JSE yesterday.
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