R22.5bn Vodacom deal signed in South Africa

Mergers, Acquisitions and Financial Results

UK cellular network operator Vodafone is due to sign the R22.5 billion deal to purchase an additional 15% of Vodacom from Telkom. According to a Telkom statement, Vodacom will be listed on the Johannesburg Stock Exchange.

The 15% stake will be sold to Vodafone for R22.5 billion in cash, less Vodacom's attributable net debt of R1.55 billion, as of 30 September 2008. Telkom will distribute 50% of the after tax proceeds from the sale transaction to Telkom shareholders, by way of a special dividend, net of any tax levied thereon. This dividend will be paid upon closing of the transaction, which is expected to take place in the first half of 2009.

This transaction will also result in Vodacom being converted to a public company, listed on the main board of the JSE. Telkom will distribute its remaining 35% stake in Vodacom to Telkom shareholders by way of an unbundling and investors, for the first time, will have direct equity in SA's largest mobile phone operator.

Before the deal, Vodafone and Telkom each owned 50% of Vodacom, leaving the group without a majority shareholder. Once the deal is completed, government and other Telkom shareholders will see their stakes in Vodacom reduced substantially. These shareholdings in Vodacom are by virtue of government, the Public Investment Corporation (PIC) and the Elephant Consortium having the largest direct stakes in Telkom.

Government currently owns 39.42% of Telkom, with the PIC holding 15.23%, the Elephant Consortium 5.8%, Liberty Group with 2.97%, Sanlam 2.17%, and two Telkom treasury stock companies with a combined 4.07%.

Once the deal is finalised, the direct shareholdings of some of those shareholders in Vodacom will be reduced. This will leave government with a 13.8% stake in Vodacom, down from 19.9%; the PIC will see its stake drop to 5.3%, from 7.6%; the Elephant Consortium will have its stake reduced to 2%, from 3.9%; and the other shareholders that include Sanlam, Liberty Group and others will see their combined stakes fall from 17.6% to 13.8%.

Government wanted seven conditions to be met before it gave the deal its blessing. However, it is not yet known to what extent these conditions were actually met.

The first is that Vodacom Group's CEO should be a black person; the second is that the CEO of the operating entity should be a South African. Thirdly, government also wanted assurances that no retrenchments would occur and that Vodafone sign a deal with organised labour. Another condition is that Telkom does not use this opportunity to outsource its core labour force.

The fifth condition was that Vodacom has exclusivity over Vodafone's sub-Saharan markets. The sixth condition was that government shares in Vodacom will be locked up for only one year and, finally, that Vodacom retains its South African tax residency and that, if listed, Vodacom's primary listing will be on the Johannesburg Stock Exchange.

Sources say the ruling African National Congress was initially against the deal because it was seen to be benefiting the same set of people who managed to get fairly large Telkom stakes after the Tintana Consortium sold its 15% stake in 2006.

Among those was the Elephant Consortium, which is made up of two other investment consortiums – Lion and Buffalo. Key people involved there were Andile Ngcaba, a former director-general of the Department of Communications, and currently chairman of Dimension Data SA, and former presidential spokesperson Smuts Ngonyama, who helped facilitate that deal.