Further to the SENS announcement on 30 September 2013, Vodacom has reached an agreement with the shareholders of Neotel Proprietary Limited to acquire 100% of the issued share capital in, and shareholder loans against, Neotel for a total cash consideration equivalent to an enterprise value of R7.0bn.
Neotel, which started operations in 2007, is the second largest provider of fixed telecommunications services for both businesses (commonly referred to as enterprise services) and consumers in South Africa. The company has access to over 15,000 km of fibre-optic cable, including 8,000 km of metro fibre in Johannesburg, Cape Town and Durban. Neotel also has access to 2 x 12 MHz of 1800 MHz spectrum, 2 x 5 MHz of 800 MHz spectrum and 2 x 28 MHz of 3.5 GHz spectrum.
Neotel will become a subsidiary of Vodacom South Africa and the combination with Vodacomâ€™s South African fixed enterprise business will create a national service provider with annual revenues of more than R5bn.
Vodacom sees a significant opportunity to accelerate growth in unified communications products and services by integrating its extensive distribution and marketing capabilities with Neotelâ€™s fixed network and product capabilities. The combined entity will be able to offer an expanded and enhanced range of converged services (e.g. hosted PBX, OneNet) to enterprise customers. Vodacom estimates revenue synergies with a total net present value of approximately R0.9bn after integration costs.
The combination of Neotelâ€™s and Vodacomâ€™s networks will improve overall network availability and reduce the cost to serve customers. The combined business will also be ideally positioned to accelerate broadband connectivity in line with the South African Governmentâ€™s broadband targets, enabling Vodacom to take a leading position in the fibre to the home and fibre to the enterprise segments of the market.
The combined entity will also be able to use the radio spectrum currently assigned to Neotel more effectively. This spectrum will enable Vodacom to accelerate the roll-out of LTE (commonly referred to as 4G) services, providing high speed, high quality wireless connectivity to a greater proportion of the South African population.
Vodacom expects to achieve substantial cost and capex synergies with an annual run-rate of approximately R300m before integration costs in the full fifth year post completion, equivalent to a net present value of approximately R1.5bn after integration costs. These savings will primarily be derived from the joint utilisation of Neotelâ€™s extensive fibre network and the elimination of overlapping elements, joint procurement and the combination of overlapping administrative functions. The transaction values Neotel at a multiple of 8.8x annualised 1H2014 OpFCF, adjusted for cost and capex synergies.
Vodacom will fund the acquisition through available cash resources and existing credit facilities.The transaction remains subject to the fulfilment of a number of conditions precedent including applicable regulatory approvals and is expected to close before the end of the financial year.
Speaking about the transaction, Vodacom Group CEO Shameel Joosub said:Â â€œThrough the combination of these two businesses, the provision of a wider range of business services and much needed consumer services like fibre-to-the-business and fibre-to-the-home becomes a concrete reality â€“ it will be good for the consumer, good for business and good for the country.Â And for our investors, the transaction fits perfectly within the priorities of Vodacomâ€™s growth strategy focused on continuing our investm ent in data and our Enterprise business.â€