EXPANSION INTO AFRICA IS TOO COSTLY SAYS VODACOM’S CEO

Mergers, Acquisitions and Financial Results

Cellular operator Vodacom has conceded that it may never manage to expand into more countries, forcing a shift in strategy away from geographic growth towards fancier services including mobile television.

Cellular operators are engaged in a voracious scramble for territory and new markets, with Celtel paying $1bn last week for 65% of Nigeria's V-Mobile, and MTN paying $5,5bn to absorb the pan-African and Middle East player Investcom.

Vodacom is the first to declare the acquisition strategy too expensive, and to concede that it may confine itself to its existing five countries. "If we get any more we will count ourselves fortunate," CEO Alan Knott-Craig said yesterday.

As well as being deterred by the astronomical acquisition prices, Vodacom is barred from playing north of the equator by a restrictive deal with its 50% shareholder, Vodafone. That confines it to a cluster of small, poor countries with little growth potential.

Vodacom and its other shareholder, Telkom, are both urging Vodafone to lift the restriction, but it may already be too late.

"Even if the agreement is changed the cushy time to get into Africa is gone," Knott-Craig said in an interview. "I don't know a single market in Africa which is a no-brainer -- they all have established players, and the players which weren't cash flush are now much better capitalised. Prices being paid for acquisitions now are simply too high."

Earlier this year Knott-Craig was thwarted in his ambition to enter Nigeria, where he was striking a deal to take 51% of V-Mobile for about $750m. Vodafone declared the price too high, and Vodacom was forced to abandon the potentially most lucrative market on the continent.

Opportunities might "pop up", and Vodacom would keep looking, "but Nigeria was the last good opportunity, and for our shareholders to walk away was a disappointment", he said.

Its new twofold strategy is to offer sexier services and to focus on growth in Lesotho, the Democratic Republic of Congo, Mozambique and Tanzania, with a combined population of 170-million people to target. "We have to go sideways," he said.

Its main thrust in SA will be to persuade people to watch television on their handsets, even though mobile television is still an unproven market, with the exception of pockets such as Korea, where users are addicted.

"We will definitely get into television," Knott-Craig said. "DStv costs R400 a month, and has only 1,5-million users. We could get 15- to 20-million if we brought the prices down. We could invest the money, take the risk, make it free and get people used to it" -- and then start charging for the service, he said.

Vodacom's massive profit margin of 34.7% would not be sustainable under that shift in focus, but achieving far lower margins on a far larger revenue should still see the net profits rise, he said.

Vodacom will probably help to establish a "Mollywood" industry, producing television shows for mobile viewing. It has already launched free trials of mobile television, using broadcasting rather than cellular technologies. It is applying for a broadcasting licence, but is also talking to all of SA's existing licence holders.

Business Day