The Competition Commission just slapped down Vodacom and Remgro’s plans to merge their telecoms operations, but the Minister of Trade and Industry, Parks Tau, has come to the rescue, and wishes to overturn the deal in appeal. Funny enough, so does the DA, who run the Department of Communications and Digital Technologies with Solly Malatsi.

Duncan McLeod (no, not that one), editor of TechCentral, has also come out against the Competition Commission. The media in general appear to be strangely incurious about the nature of this deal, or else crying crocodile tears over it, but it is no small beer.

Monopolies create poor service levels, and have the power to squeeze consumers without worrying about quality of service, because they can deny market access to competitors. The biggest losers are going to be, well, everyone who isn't cut into the deal. Vumatel and DFA service levels have already been on the decline, and will most probably just get worse in this bigger structure.

In fact, Vumatel, the main home fibre component of the merger, recently underperformed Telkom in customer service (scoring only 4/10), and has been fuelling its expansion with unsustainable debts.

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‍The deal

The idea that was defeated, was for Vodacom to buy 30% of a fibre conglomerate called Maziv (mostly owned by Remgro), for R13 billion, with an option for 40%.

This cluster includes SEACOM (which sells high-volume internet services at the corporate level, and runs one of our main submarine cables which connects to the rest of the world), Dark Fibre Africa (which runs long-distance, high-volume overland connections, including the connections to most of the country’s cell phone towers), Vumatel (last-mile home fibre) and Herotel (small town, rural and wireless connectivity), SADV (an internet service provider), Rise Telecoms (a home and office WiFi installation company), and Britelink MTC (a fibre construction company).

Remgro has been busy working towards this for some time, creating a vertically integrated collection of companies which will have all the ingredients to be a second Telkom, just in private hands. The addition of Vodacom will slot in the last piece, and the new conglomerate would be able to vertically control the entire infrastructure chain for supplying internet connectivity by land, sea or air, and gradually choke out all competition by simply raising the prices for access to any of the layers listed in the above paragraph.

DFA is most important in the story. A company with the leverage and dominance to give or deny access to almost all cell towers in the country should ideally be as neutral and independent as possible, with an open access business model. Most of our home fibre network operators also rely on DFA infrastructure to connect homes to local datacentres.

Vodafone’s market dominance is already little disputed - Vodacom has about 51.6 million customers themselves, 42.1 million prepaid and 6.9 million contracts. The bulk of the country, after all, uses mobile data rather than fibre to connect to the net, and Vodacom had a head start, originally part of the state-owned Telkom network.

Vumatel holds about 36% of the fibre-to-the-home market, and DFA is the key to 85% of the country’s internet access, by virtue of its focus on long-range and high-volume connections. DFA also holds the connection services for the country’s cellphone masts, which connect the vast majority of all cellphone networks to the internet.

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Buyout or bailout?

It may seem a bold claim that Rupert and Vodafone are conspiring to monopolise the entire South African telecoms sector, but the deal makes no financial sense without this assumption.

CIVH is in serious debt, and Vodacom would effectively be bailing them out by buying their stock for somewhere between R14-17 billion. They also aim to inject another R10-25 billion into the company. Harith General Partners also injected some cash by buying 15% of CIVH for R6.5 Billion, buying out the state employee pension fund’s share.

The subsidiaries may look pretty okay at a glance - Vumatel’s revenue growing 11% last year to R1.8-billion, driven almost entirely in its lower-income Reach network. and growing by 3.2% this year, the company is in the red. DFA’s revenue increased by 2.3%, to R1.3-billion, which looks more modest, but is financially more sound. Given its sector dominance, they can effectively make money by osmosis at this point. But this isn’t enough to carry the whole system.

But the debt is enough to erase all this growth. Maziv recently refinanced and expanded its debt package to R25 billion, in order to restructure what is mostly debt owed by Vumatel. This refinancing involves a syndication process with 11 lenders, attracting significant interest with an oversubscription rate of 1.58 times. CIVH reported a 96.7% drop in headline earnings for the six months to December 2023, with headline earnings dropping from R323-million to R10.5-million.

Remgro reported that its fibre operations as a whole swung to a R75-million loss by June 2024, down from a R206-million profit in 2023, citing higher finance costs, maintenance, and “competition”.

Because of Vumatel's debt, it needs to keep pumping capital to keep growing, and to give it a good valuation.

CIVH has been aggressively acquiring shares in Herotel, and the Competition Commission had to block them from taking a controlling share last year. In lieu of that, they have sidled up to 49.5% ownership, and dumped money in from Vumatel (who cannot even afford their own debt service costs) to fund a massive rollout into middle and lower-income areas.

A shrewd operator could simply write off the mountain of unsustainable debt under Vumatel, sell it off to Herotel, and liquidate the company. One could then buy out the rest of Herotel.

While Vumatel advertises its services as “open access” - that is, internet service providers (ISPs) can compete on a level playing field for access to the infrastructure - Herotel doesn’t - they run their own in-house ISP service. Herotel is also profitable, and is managing to use new funding to expand into low-income areas.

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Desert grazing

To understand why this is happening now, we must observe a simple pattern in the last ten years of fibre rollout in South Africa.

When optic fibre cable access was a new technology, South Africa was full of easy pickings - most places had no such infrastructure, and there was a high demand for quality internet. For a while, the new companies who rose up to take the lead did a fairly good job, but eventually all the greenest pastures had been serviced.

Now the fibre market is steadily declining in quality under quasi-monopoly conditions. It is costly to lay fibre where a competitor has already laid theirs, because too few people actually switch fibre services, so in the industry, this is actually called “overbuild”, and is to be avoided. This places the first company to reach a neighbourhood in a position to dictate prices, a position 80% of South Africa’s neighbourhoods find themselves in.

And so what remains? Well, there is a bit of middle-class and upper-earner areas still to be covered, but in the race to get there, Vumatel, which is the biggest of its competitors, has ground entirely to a halt, crippled by the lack of new debt to finance their expansion.

Townships and outlying rural areas are also potential targets, but they are already served by wireless internet services. This is like moving your new cattle to graze in the scrubland of the Karoo - only a monopoly over a vast area would make it possible to feed the herd.

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Cannibal market

One of the key reasons Remgro and Vodacom say they (and the country) need the deal is to serve the poor, and give them access to the internet. But this just seems like virtue signalling - after all, most people have access through their phones already (can you see where this is going?).

Vumatel’s lower-income initiatives, such as “Vuma Key” and “Vuma Reach”, aim to provide cheap broadband access to the poor, priced from R100 to R400 per month, for people earning less than R5 000 per month.

Lower-income clients tend to be unreliable debtors, preferring pay-as-you-go deals to contracts for this very reason, and townships are home to extortion gangs who frequently disrupt fibre installation companies. For these and other reasons, Octotel, who tried to make such a model work not too long ago, has quietly abandoned their expansion into the townships because of low uptake.

But with Vumatel and Herotel’s deep credit extensions, they can steam ahead (or at least they could until now). This could be described as a loss-leading operation. Loss-leading is when you load up a company with debt and equity in order to finance a rapid expansion below profitability, so that the money can be made back after the competition has been eliminated. Not very competitive, but not illegal.

But even this makes no sense - most people prefer to use mobile networks, of which Vodacom is dominant. The dominance of Vodacom in this customer base raises strange questions - are they going to try to sell two internet contracts (one mobile, one fibre) to every shack in eKasi?

If this business model is successful, which is a big if - one side of the new merger will be cannibalising the other side’s customer base. A company competing against its own subsidiary and financing that competition?

This does not make sense.

What does make sense is that Vodacom will now have own a share in the profits of the cell mast connection services on which they reside. Should DFA raise the tariffs, Vodacom gets a cut, and all other cell networks get squeezed. Subsidising a loss-leading fibre expansion to beat out all other home fibre companies is a small price to pay for market dominance.

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‍Who, whom?

Strangely enough, the deal was directly facilitated by the Ministry of Trade and Industry, if their public statements are any guide:

The Ministry participated in the merger proceedings on public interest grounds in line with merger provisions of the Competition Act, which led [to] the merger parties committing substantial public interest conditions to significantly boost investments and growth of fibre and mobile connectivity in South Africa. This [is] in line with South Africa’s priorities for industrialisation, reindustrialisation, and investment to foster economic growth and create jobs.

This would explain why the Minister has filed an appeal against the Competition Commission. It wouldn’t explain why he was behind the private monopolisation of the telecoms sector in the first place.

Tau has gone even further than lodging an appeal on behalf of Remgro though. He has called for a total overhaul of the Commission itself. But then again, so has the DA. They seem to be utterly within Johann Rupert’s pocket on this issue.

But from even a cursory glance at the business model proposed, the only way the deal makes any financial sense, is if they intend to create a national monopoly by vertically integrating every layer of the telecoms industry, which is, just coincidentally, what the deal would achieve.

The main architect for this business model appears to be Pieter Uys (no, not that one), the former CEO of Vodacom, and present executive of Remgro. He is certainly impressively talented, but his pursuit of these acquisitions has led to a few raised eyebrows. The reason for seeking partnership with Vodacom is not just the network's market dominance, but also because the management of the companies walk in the same tight social circle. Besides, not many other companies will buy in an the valuation they are proposing.

Johann Rupert is, of course, the elephant in the room, and aside from his control of Remgro, a massive donor to both of the ruling political parties.

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What about the DA?

Well, as I noted to start with, the DA and the ANC are in full agreement - Johann Rupert and Vodacom are entitled to their vertically integrated telecoms conglomerate, and any anti-trust legislation is blocking investment and depriving the poor of vital jobs and services.

Disregarding the histrionics for now, what is noticeable is how the DA framed their support of Minister Tau’s appeal. Their argument is pure bullshit and emotional manipulation:

While the Tribunal’s decision raised concerns about competition, the DA believes that in sectors like fibre, collaborative investments can drive down costs and accelerate service delivery. The blocked deal risks reinforcing existing inequalities and denying millions of South Africans the chance to participate meaningfully in the digital economy.

"Collaborative investments" is an extraordinary euphemism for market capture. They "recognise the importance of collaborative investments in reducing infrastructure duplication”  - effectively means helping telecoms companies form national-level cartels that do not compete to provide services.

Other points they promote are far less honest. They claim to “Promote Pro-Market, Not Pro-Business Policies - Shifting focus from protecting incumbent players to fostering innovation and removing barriers to entry for smaller businesses and entrepreneurs.” In what way does any of this resemble such a principle?

While they claim to wish to see an expansion in “oversight and accountability, strengthening the Competition Commission and Tribunal’s capacity”, they are in practice, attempting to cut its balls off.

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