Vodacom South Africa eyes government's 13.9% stake

Mergers, Acquisitions and Financial Results

Vodacom is concerned that it does not yet meet black economic empowerment criteria of 30% and is eyeing the government's 13.9% stake in the company, worth about R16.5 billion, to help solve the issue.

BusinessLive has learnt that Vodacom CEO Pieter Uys met with Communications Minister Roy Padayachie late last week with the aim of starting negotiations over the government's stake in Vodacom. However, the direct mention of such a sale was not made.

Tiyani Rikhotso, the spokesperson for the ministry of communications, said: "Vodacom has, however, raised concern about its inability to meet the empowerment percentage of 30% and was keen to know government's intentions with its stake going forward." Rikhotso said the government had not discussed the possibility of letting go of its shareholding in Vodacom.

Vodacom has refused to comment as it is in a closed period ahead of the release of its year-end results scheduled for Monday, May 16.

Government's Vodacom shareholding is what it gained after Telkom's 2009 sale of its 50% stake, which left UK-based Vodafone with 65% in a deal worth R22.5 billion. Because of its shareholding, the government has the right to appoint one director to Vodacom's board and it is currently former deputy finance minister Jabu Moloketi.

Padayachie has indicated that the government is not planning to sell its 38.5% stake in Telkom, but analysts said that selling the Vodacom shareholding may be a little less risky from a political standpoint.

Vodacom's reason for wanting the stake is the mooted radio frequency spectrum auction that the Independent Communications Authority of SA (Icasa), the telecommunications regulator, is planning.

Government's stake is becoming a means for the country's largest network operator to meet the auction requirements. But to do such a deal it would have to juggle a number of regulatory, political and economic hot potatoes.

Icasa was supposed to auction off parts of the highly sought after 2.6Ghz and 3.5Mhz ranges that allow for faster data transfer and increased capacity on the mobile networks.

However, Icasa called off the auction in June 2010 as it wanted to rework the regulations. Marcia Socikwa, the Icasa councillor overseeing the process, told Parliament's communications committee last month that part of the requirements would be that potential bidders would have to have 30% of their shares held by previously disadvantaged persons.

In 2008, Vodacom transacted a black economic empowerment deal in which about 6.25% of its shares, in a deal worth 7.5 billion rand, were disbursed. However, this stake may have since decreased in percentage terms.

Macquarie Bank analyst Martin Dullaart said: "That deal was finalised in terms of the old black economic empowerment charter, which allowed for absolute amount value. However, as Vodacom's value has kicked up, then the black economic empowerment valued has ticked down."

Dominic Cull, a telecommunications regulatory lawyer at Ellipsis Regulatory Solutions, said: "The problem for Vodacom is that it thought it had done enough under the old charter conditions. Now it seems that Icasa is just going for a flat 30% stake irrespective of what has been done in the past," said. Dullaart pointed out that Vodacom has limited leeway in doing a black economic empowerment transaction.

"Sixty five percent of its shares are held by (UK-based parent) Vodafone, another 13.9% by government and it has bought back 1% of its shares, leaving the Johannesburg Stock Exchange minimum requirement of having a 20% float," he said.

Dullaart indicated that such a deal made business sense, although Vodacom would also have to comply with JSE regulations on treating all shareholders equally.

Another factor would be the structuring of the deal - should Vodacom do it by itself? Or should Vodafone buy the shares? Dullaart said that, while Vodacom had net debt of about 10 billion rand on its books, it had a stable cash flow and it seemed it could easily do it.

The deal, if consummated, could have a major economic impact on the government's finances. Even if only half the shares were sold and that realised eight billion rand, this would almost be equivalent to the nine billion rand jobs fund that the government has hinged its plan on to create five million jobs by 2020.

"It makes perfect economic sense for the deal to happen," said Nedbank senior economist Nicola Weimar. "Firstly, the cellular network industry is highly competitive and it makes no sense for government to have a direct state in one of the participants."

Weimar said the cash injection into government finances that would result from the sale would be highly beneficial as the country was experiencing marginal growth and a growing budget deficit.

But the Congress of SA Trade Unions (Cosatu), which is allied to the ruling African National Congress (ANC), is opposed to the sale. The labour movement also vigorously opposed Vodoacom's unbundling and listing two years ago, resulting in it supporting Icasa's last-minute attempt to halt the process that was rejected in a dramatic court action.

"We would oppose such a sale because it lessens the democratic control of such an organisation," said Cosatu spokesperson Patrick Craven. "While government's stake may be a minor one, it is still symbolic and it should not be sold.