Vodafone Buys South Africa's Neotel

Vodacom, the Vodafone-owned company serving South Africa, is buying Neotel, the  second largest provider of fixed telecommunications services in South Africa.

Neotel will become a subsidiary of Vodacom South Africa, creating a national service provider with annual revenues of more than R5 billion (US$0.48 billion).

Vodacom will gain 15,000 kilometers of optical fiber network, including 8,000 km of metro backbone facilities in Johannesburg, Cape Town and Durban.

Neotel also has rights to 24 MHz of mobile spectrum (2 x 12 MHz) at 1800 MHz, plus 10 MHz of (2 x 5 MHz) of 800 MHz spectrum and 56 MHz (2 x 28 MHz) of 3.5 GHz spectrum.

Vodafone says the deal will allow it to accelerate fixed network fiber to home and fiber to business connections and support a faster Long Term Evolution fourth generation mobile network.

Vodacom also expects annual cost and capital investment savings of US$28.9 million (R300 million, before integration costs) in the full fifth year, representing a net present value of approximately $140 million (R1.5 billion) after integration costs.

In one sense, the deal represents a trend: the integration of mobile and fixed assets as a fundamental underpinning of service provider strategy--telco or cable TV--in many developed nation markets.

The trend is most noticeable in Western Europe, where Liberty Global recently has moved to buy  both cable TV and mobile assets, and Vodafone owns mobile and cable TV assets.

Spain’s Telefonica is offering 725 million euros ($1 billion) for a controlling stake in Spain's pay-per-view TV operator, Digital Plus—Telefonica already owns 22 percent of Digital Plus.

Integration of mobile and fixed network infrastructure, in particular cable TV broadband networks, are emerging as a key strategic direction for Western European service providers.

At one point, AT&T in the United States bought all the assets of Tele-Communications Inc., at that point the largest U.S. cable TV provider, as the hoped-for underpinning of AT&T’s local access strategy.

The reasons for the strategy are simple enough: legacy lines of business are mature and declining. Combining mobile and fixed assets adds new product lines to bundle and boost revenue growth.

Unlike mobile or fixed telecom services, video entertainment revenues still are growing. Also, video entertainment has emerged as the second most-important fixed network service, after high speed Internet access.

Some might argue that cable TV operating costs, and the ability to upgrade Internet access speeds, are lower than those of competing telco networks, as well, allowing mobile service providers to capture fixed network capabilities with lower operating and capital costs.

In many markets, cable TV operations additionally do not have mandatory wholesale obligations imposed on telco access networks.