Competition Commission blocks rollout of affordable fibre to poor communities

The Competition Commission’s decision to block Vumatel and DFA parent company CIVH from selling a 30% stake to Vodacom has come back to haunt South Africa’s poorest households.

Remgro, which owns 57.03% of Community Investment Ventures Holdings Limited (CIVH), reported on Tuesday that the company’s earnings nosedived 96.7% — from R184 million to R6 million.

This was mainly due to a 400 basis points increase in interest rates from 7.75% to 11.75% between 1 April 2022 and 31 December 2023, Remgro said.

To arrest the earnings decline, CIVH had to cut expenditure.

If losses get out of control, there is a risk the company could enter a death spiral where it is forced to take on more debt to cover its losses.

This leads to a vicious cycle of ever-increasing expenditure to repay debt while taking on more debt to cover escalating expenses.

Last year, CIVH’s debt already stood at around R20.5 billion — most of which belonged to Vumatel.

One of the first places companies like Vumatel would look to cut costs is their capital expenditure budget.

In other words, stop building new fibre.

Remgro revealed in its half-year results presentation that Vumatel has already scaled back capital expenditure significantly.

It has entirely halted the expansion of its Vuma Core network — its original fibre-to-the-home service aimed at households earning over R30,000 per month.

During the six months between March and September 2023, Vumatel only added 109,240 homes to its network (“homes passed”). This is down from 234,000 during the same period in 2022.

Since Vuma Core is no longer expanding, the additions in 2023 came from Vuma Reach and Vuma Key.

Vuma Reach is aimed at households earning between R5,000 and R30,000 per month. This has been rolled out to areas like Mitchells Plain in Cape Town.

Vuma Key is aimed at households earning less than R5,000 per month.

MyBroadband understands that the Vuma Key project has been particularly hard hit by the capex cuts.

Vumatel launched a Vuma Key pilot programme in the Alexandra township last year, offering a 20Mbps uncapped fibre service for between R100 and R150 per month.

The goal is to get the entry-level price to R99 per month or lower.

Vumatel and Remgro had hoped to get a cash injection to accelerate this rollout by selling a stake in the business.

Knowing that a deal with a South African network operator would face heavy opposition from competitors and the Competition Commission, the company initially spoke to international investors.

However, these all walked away from negotiations at the start of the Covid–19 pandemic.

CIVH then started looking for a partner at home and began negotiations with Vodacom.

The proposed transaction involves Vodacom taking a 30% stake in CIVH in exchange for at least R9 billion in cash and fibre assets valued at R4.2 billion.

The cash consideration includes a fixed R6 billion, with a variable portion depending on CIVH’s valuation when the deal goes through.

Vodacom’s fibre assets that would be added to CIVH’s stable include its residential, business, and tower fibre infrastructure. It excludes Vodacom’s long-distance network.

Both companies have assured that Vodacom’s fibre network would immediately become open access as part of the deal, allowing third-party ISPs to offer services over the infrastructure.

To facilitate the transaction, Vuma and DFA’s assets were spun out into a wholly-owned subsidiary of CIVH called Maziv.

The Independent Communications Authority of South Africa approved Vodacom and Maziv’s proposed transaction.

However, the Competition Commission raised several red flags and recommended against the deal being approved. It raised three key points and concerns:

1. Diminished competition between Vodacom and Vumatel in fixed 5G and fibre.
2. That Maziv, and specifically DFA, would give Vodacom preferential treatment with respect to backhaul fibre.
3. Maziv/CIVH would roll out to lower-income areas anyway — even without Vodacom’s investment.

Maziv slashing its capex budget and effectively pausing its Vuma Key rollout proves how misguided the Competition Commission’s latter assumption was.

Remgro had previously warned that Maziv could not take on much more debt.

Therefore, any further fibre network expansion would have to be funded from profits.

Soaring interest rates have now cut into profits, severely inhibiting the company’s ability to keep building.

Remgro has also argued that it is incorrect to think that Vodacom would not roll out 5G to lower-income areas where Maziv has fibre and vice-versa.

It explained that Vodacom will only be a 30% shareholder in Maziv, with the option of increasing to 40%.

The majority shareholders will want Maziv to compete.

Similarly, Vodacom has shareholders who want the company to sell services to as many people as possible — not to mention the conditions attached to its spectrum licences.

Furthermore, whether 5G and fibre should be considered direct competitors is debatable.

Regarding concerns over Vodacom getting preferential treatment from Maziv, Remgro said the same principles hold.

Maziv’s majority shareholders will want the company to do as much business with as many companies as possible — and get the best price possible.

Regardless, both companies were willing to sign obligations and commitments with the Competition Commission to assuage its fears.

Vodacom was also willing to provide the Competition Commission with additional coverage guarantees for lower-income and underserved communities.

Unfortunately, the Competition Commission was unswayed by the commitments offered, saying it would be too difficult to monitor and enforce compliance.

Although the Competition Commission’s evaluation of the deal is not binding on the Competition Tribunal, it commands tremendous influence.

Had it approved the deal with the conditions it had negotiated, that would have been it.

As it stands, the Competition Tribunal will hold a final hearing on 24 May 2024, after which it will decide whether to approve or block the deal.