Tata to Increase Stake in South Africa’s Neotel to 56 Percent

Mergers, Acquisitions and Financial Results

South Africa's second national network operator Neotel will soon be 56% Indian-owned, with Eskom and Transnet selling their 30% stake to Bombay-listed Tata Communications.

Tata already owns 26% of Neotel, which it bought after a lengthy process to find an international telecoms player to supply the skills and cash needed to compete with Telkom.

Last week Tata said it had entered into an agreement with the state-owned enterprises to acquire their combined 30%. The potential value of the deal was not disclosed in the notice issued on the Bombay Stock Exchange.

One insider said the move should speed up Neotel's decision making and hone its operational abilities by streamlining its ownership. Neotel has been dogged by unwieldy shareholding from the start, after a farcical process to cobble together a variety of interests and still find credible investors to buy into the business.

Allowing Tata to take a bigger stake could also give Neotel access to more cash more quickly than if it had to rely on state-owned entities to contribute to its planned infrastructure investment of R11bn.

The source said it was important to get the state-owned enterprises out of Neotel. "We need to reorganise the shares because it's cumbersome," he said. "We need a situation where the business has a minimal number of shareholders and we need to isolate the business from politics."

Neotel had not been plagued by political pressure arising from government involvement, but there were internal politics between the different entities, he said. The exit of Eskom and Transnet had been on the cards for about six months, and Neotel's customers should notice a difference once they were out, the source said. "The business will be much smoother because it will improve the decision making process by far."

Executives from Tata Communications are expected in SA this week to finalise the buyout details. Eskom and Transnet were each granted a 15% stake in Neotel in November 2001, contributing their telecoms assets to form the basis of the new operator.

They were joined by the black empowerment group Nexus with 19%. Stakes of 12.5% each were awarded to CommuniTel and Two Telecom Consortium after a controversial bidding process that attracted local entrepreneurs eager for a slice of the potentially lucrative action.

The six-way structure was acrimonious from the start, with Nexus taking legal action and applying for a judicial review when Two Consortium and CommuniTel were awarded shares, despite their bids initially being rejected as sub-standard.After protracted negotiations the legal action was withdrawn and the parties finally managed to launch their operations, several years after the target date.

Last week's announcement from Tata said the deal to buy out Eskom and Transnet was subject to certain conditions that may take up to 180 days to be fulfilled. Once the deal was concluded Tata would own its 56% stake through Tata Communications and Tata Africa, it said. Tata Communications runs a world-class telecoms network and has offices in more than 40 countries. Its investment in Neotel gives it a strong anchor on which to build an African footprint, it said.

Operating a telecoms business is not a core activity for either Eskom or Transnet. The latter has been pursuing a turnaround strategy by shedding its non-core activities, and in November it sold its telecoms arm Transtel to Neotel for R230m.

Business Day (Johannesburg)