Vodacom’s “surprising” valuation of IoT.nxt analysed

Vodacom announced in May 2019 that it had reached an agreement to acquire a majority stake in IoT.nxt – a transaction which was concluded on 23 August 2019.

Vodacom said this acquisition would accelerate its Internet of Things (IoT) strategy and transform its dedicated IoT business unit.

IoT is a growing part of Vodacom’s portfolio, and the IoT.nxt acquisition, therefore, did not come as a surprise.

What was unexpected, however, was the price. Vodacom acquired 51% of IoT.nxt for a maximum consideration of R1.028 billion, of which R469 million was settled in cash.

Many industry players asked what Vodacom saw in IoT.nxt to justify a R2.02-billion valuation, especially when looking at the company’s finances.

Vodacom’s latest financial results included “revenue of R23 million and net loss after tax of R40 million” related to IoT.nxt for the year ended 31 March 2020.

Vodacom told MyBroadband the disclosures and IoT.nxt revenues include its results from the acquisition date only, i.e. from 23 August 2019.

This means since the Vodacom acquisition, IoT.nxt generated around R3.2 million in revenue per month and made a loss of R5.5 million per month.

Vodacom highlighted that this revenue excludes money from services that IoT.nxt has provided to Vodacom internally.

These include base station monitoring, building management, and a number of other IoT.nxt solutions that Vodacom has leveraged for its own internal use.

Vodacom’s R2-billion IoT.nxt valuation was therefore not based on revenue or profit, as highlighted by an Africa Analysis comment when the deal’s details were announced.

Africa Analysis called Vodacom’s IoT.nxt valuation the “most surprising” of 2019, based on the fact that the value of projects undertaken by IoT.nxt to date does not support this valuation.

“The purchase price must have been based to a degree on anticipated future revenue flow, given IoT market expectations,” it said.

Africa Analysis said it is difficult to unpack this deal’s valuation drivers, but it seemed that Vodacom has paid a premium IoT.nxt, partly based on the hype around IoT.

What IoT industry players say about IoT.nxt

To get a better understanding of Vodacom’s valuation of IoT.nxt and the IoT industry, MyBroadband spoke to industry experts about the company.

Everyone who MyBroadband spoke to expressed surprise at IoT.nxt’s valuation, saying the company is likely to struggle to live up to Vodacom’s expectations.

These industry players pointed to the following reasons for why they think the company is overvalued:

The market size of IoT in South Africa may be overestimated.
IoT.nxt’s finances and growth do not justify such a high valuation.
IoT.nxt’s international ambitions will be far more difficult to achieve than anticipated.
IoT.nxt’s technology offering is not as unique as some people believe it is.

One industry player who works in the local IoT industry and asked to remain anonymous told MyBroadband IoT.nxt’s core offering is similar to traditional SCADA platforms.

SCADA (Supervisory Control and Data Acquisition) has been used for years to monitor and control equipment used in the telecoms, energy, transportation, and other industries.

He said IoT.nxt’s platform is essentially a modern take on SCADA and does not offer a vastly different value proposition.

Another industry player, who also asked to remain anonymous because of his work with IoT.nxt, said the company’s international exposure prior to the acquisition was vastly exaggerated.

He said the company is struggling to successfully implement its current Vodacom projects which are core to meeting its financial targets.

Analyst opinion

Derrick Chikanga, IT analyst at Africa Analysis, told MyBroadband that over the last financial year Vodacom’s IoT revenue was R893 million – approximately R248 million more than the previous year.

“Revenue from M2M / IoT SIMs probably accounted for a bit less than half of this. This is the traditional Vodacom revenue,” said Chikanga.

“So, maximum revenue from non-SIM IoT activity was probably around R136 million. Even if all of this can be ascribed to IoT.nxt, the ROI on the IoT.nxt may take a while.”

He said Vodacom’s latest financials affirm their previous comment that the valuation of IoT.nxt was probably strongly based on future revenue and market potential which will take a few years to manifest itself.

“Our view is that the IoT market in South Africa – connectivity and management only – may be worth around R16 billion by 2025,” said Chikanga.

“And then there is also the global market, where IoT.nxt will aim to expand. The COVID-19 situation may be to Vodacom’s advantage in this respect.”

The general expectation is that we will see faster and deeper automation taking place in various sectors of the economy – globally and in South Africa.

This will likely result in faster implementation of IoT projects, with quicker and possibly greater revenue flow from IoT.

He said the structure of the IoT.nxt acquisition, where R469 million was paid in cash and the balance of R559 million is contingent on the future performance of this business, sheds further light on IoT.nxt’s valuation.

This means that if the expected revenue flow does not materialise, Vodacom will not pay the maximum price of R1.028 billion.

“This makes the acquisition more rational,” said Chikanga.

Vodacom’s IoT.nxt finances

Vodacom’s consolidated annual financial statements for the year ended 31 March 2020 sheds further light on the deal.

Vodacom explained it acquired a 51% equity interest in 10T Holdings and IoT.nxt – together called IoT.nxt – for a maximum consideration of R1.028 billion.

Its financial statements highlighted that the acquisition date fair value of the consideration has been determined as R748 million after raising a liability for contingent consideration payable of R279 million.

Vodacom added that the fair value of IoT net assets acquired was R204 million and that goodwill related to this deal amounted to R590 million, which represents future synergies.

Vodacom Business Chief Executive Officer William Mzimba explained the disclosure in its financial statements notes the maximum consideration payable for 51% in IoT.nxt of R1.028 billion.

“This is an accounting calculation and includes a series of cash injections into the business, as well as an estimate of payments that may be made to selling shareholders, which would be made on the basis of performance over the two-year period after acquisition,” said Mzimba.

“Therefore, the amounts to be paid based on performance are not yet paid and the assumption of R2 billion in value for the business is therefore grossly inaccurate.”

He said that assuming the business meets the performance milestones and that selling shareholders receive a top-up payment, the amount paid versus the value at that time would be well below the multiples paid in precedent transactions.

The image below provides a financial overview of Vodacom’s acquisition of IoT.nxt.

Vodacom Business explains IoT.nxt aquisition

Mzimba told MyBroadband that Internet of Things (IoT) is a strategic growth area for Vodacom Business and the acquisition of IoT.nxt enables them to operate across the full IoT value chain.

He added that IoT.nxt also makes it possible for Vodacom to develop best-in-class solutions for clients across several industries.

Global consulting and research firm Analysis Mason estimated that the IoT market in South Africa was set to grow to R46.4 billion by 2026.

South Africa’s IoT market, Mzimba said, is only part of the total revenue which IoT.nxt is targeting as it operates globally with customers in the UK, Europe, US, and Asia Pacific.

“We are very optimistic about the pipeline of projects that IoT.nxt is building up, both locally and globally,” said Mzimba.

“A number of Vodafone entities have also now made them the implementation partner of choice.”

He said the technology used is unique and not easily replicated in the industry, which gives Vodacom a distinct advantage.

COVID-19 and the government’s strict guidelines for companies going back to work, which include firm hygiene procedures and social distancing, can also help to drive IoT adoption.

“We firmly believe that technology can play a critical role in helping businesses implement these back-to-work protocols through the use of IoT, AI and analytics,” said Mzimba.

“In May, we launched a number of specific digital and IoT solutions to support businesses as they navigate their return to work post-lockdown.”

“Our IoT solutions, including those of IoT.nxt, have been designed to support the wide range of industries on the frontline of the nation’s fight against the current pandemic,” he said.

No comment from IoT.nxt

IoT.nxt was asked for comment regarding its valuation, international strategy, technical skills, and the uniqueness of its technology platform, but the company said it could not comment because of time constraints.

Instead, IoT.nxt’s co-founder Terje Moen told MyBroadband to “accept that we are doing great work and building another South African success story, globally”.