Battlefield SNO
There are two bids for control of South Africa`s second national telephone operator (SNO) on the table – but three competitors in the ring.The Goldleaf Trading and Optis Telecommunication consortia are vying to control 51 percent of the telephone company that is supposed to bring grey hairs to Telkom`s head and lower telecommunications costs for the entire country. But both are also wrestling with parastals Eskom and Transnet, which rather dislike the look of the aspirants and want the contest declared a tie and both rejected.Depending on who wins in the final showdown, the impact on the final SNO company, and therefore everyone with a telephone, ranges from bad to very bad indeed.If Eskom and Transnet get their way, there is likely to be a two-year period of limbo while court cases and assorted wrangling hold up the issuing of a licence, or while a new selection process is cobbled together. In the meantime, Telkom will maintain its de facto monopoly.Goldleaf, an early favourite because of its heritage and connections, would bring little capital and no big names to the new venture and would concern itself with only a small part of the market.If Optis takes control of the SNO the result could be much the same, only not intentionally, judging by the strength of its bid document. Despite paying R250 000 for the privilege of submitting a bid, it managed to confuse South Africa with Mozambique and declare that South Africa has more than a hundred million fixed line telephones installed. The real figure is closer to five million and the discrepancy, and others, do little to inspire confidence in its ability to take on Telkom head-on.Yet, as uninspiring as the options are from a user`s point of view, things could have been a lot worse. Not too long ago pundits were still confident there would be no bids whatsoever for the controlling stake in the SNO.If either Goldleaf or Optis manage to convince the Independent Communications Authority of SA (Icasa), that it is the most desirable suitor, the prize will be a union with disparate partners.Eskom and Transnet are to own 30 percent of the SNO through their telecommunications subsidiaries Esi-Tel and Transtel. Black economic empowerment consortium Nexus Connexion will hold the remaining 19 percent.Both parastatals, and to some extent Nexus, have made it clear that three is company and four is a crowd. They don`t necessarily see the need for another party and after perusing the bids submitted, Eskom and Transtel are pretty sure they don`t want to go to bed with either Goldleaf or Optis.Esi-Tel could not make an executive available for comment and Transtel did not return phone calls requesting information; but, in public comments on the bids, Esi-Tel did not pull its punches.“Our firm opinion … is that the ITA [invitation to apply] process has not attracted a viable or suitable bidder for the 51 percent partnership role in the SNO,” it told Icasa.Esi-Tel believes the proposals by both Goldleaf and Optis envisage a “sub-optimal SNO”. Goldleaf, it said, was not willing to spend the money necessary to get the new company off the ground and it considered the rather confused Optis plan inadequate.It characterised both consortiums as middle-men – bringing no money or skills to speak of to the process, but instead wanting to profit from running what is essentially a dating service for companies.“It is evident that neither of the applicants bring any additional value to the SNO that is not already contributed by the state-owned enterprises and BEE [black economic empowerment] partners or which could be easily secured by these partners through management contracts arguably at significantly better terms for the SNO.”In just five pages it manages to call the 51 percent bidders all kinds of things: destroyers of value, intermediaries and opportunists.A more reserved Transtel disparages the suitors` technical plans – which obviously do not fit in with its own plans.Optis says it wants to build a backbone network using only Internet protocol or IP infrastructure. Transtel describes that as a “high risk scenario” considering how untested IP infrastructure is. Its own network, incidentally, uses a mix of IP and the more traditional ATM or asynchronous transfer mode technology.As for Goldleaf, it seems Transtel took offence at snotty references to the network the parastatals have already started to construct, at a cost of R2 billion and more. It takes more time defending the existing network than slagging off the bridegroom.“It may initially appear that certain routes built as part of the FSN [full service network] are not justified by the potential revenues that assets may generate,” it admits, but cites self-healing ring infrastructure and other technical reasons for the construction.Goldleaf thinks a lot of the fibre optic cable laid by the parastatals is useless and has said in so many words it is not interested in the SNO paying for it. Fighting for jobs, valueGetting Goldleaf or Optis to take up all the existing infrastructure in the SNO and putting it to good use is one of the two major objectives of the parastatals. The other is to protect the jobs of its existing employees.The two state-owned enterprises have invested more than R2 billion of government`s money on infrastructure in anticipation of being part of the SNO. If the final` company turns up its nose at any part of that, certain executives will have a lot of explaining to do.That, of course, is not an argument being made in public. Esi-Tel prefers to focus on the value destruction it sees happening if Goldleaf wins, for example, and uses figures such as an 66 percent to 80 percent discount on fair value of assets to illustrate the point.Also evident is concern about the jobs of not only the executives, but the telecommunications staff already in the employ of the two companies. Esi-Tel says around 2 000 people are part of the private telecommunications networks they currently operate. Goldleaf`s “SNO Lite” strategy has room for little more than 200 employees at the launch of the new operator and Optis members mutter vaguely about “a couple of hundred” employees. Either way, a lot of people will be fired or be left sitting around at the parastatals.The two government companies have a simple solution: let them take control of the SNO, build the network they want and buy both the skills and the financing they lack.“The SOEs [state-owned enterprises] and their prospective BEE partner could easily secure non-equity-based commitments for the SNO from leading international telecommunications funders without a sacrifice of equity in the SNO to ‘intermediaries`,” says Esi-Tel.In that, at least, they have the support of Nexus. The empowerment group did not make any public comment on the two 51 percent bids, but head Kennedy Memani does not foresee trouble in attracting skills complementary to the parastatals` engineering expertise.“The good thing is that the global telecoms market is in a downward position now and lots of good skills are lying idle around the world. We must just find them,” he says. “We recognise the importance of a partner, or at least the skills a partner can bring, but you can buy skills.”Memani foresees a 51 percent partner bringing something that can`t be bought to the table: leadership.“You don`t want to strangle the SNO in boardroom politics,” he says referring to previous corporate disasters. “You must have a leader in the business.”Nexus says it is willing to take up the challenge if the mantle of leadership is thrust upon it. But as a junior partner in the business, and with the least telecommunications experience of all parties, that is highly unlikely. Nor are either Esi-Tel or Transtel, who have not always seen eye to eye, likely to happily hand the other the crown. One possible outcome is Nexus playing kingmaker and one parastatal ending up disgruntled. Not exactly a recipe for marital bliss.Esi-Tel and Transtel are not the only ones that want both the Goldleaf and Optis bids thrown out. A group called Media and Broadcasting Consultants (MBC), which includes former Icasa councillor Neels Smuts, has submitted to Icasa a detailed analysis of how each bid fails to meet criteria government has set.As a result, it says, there is no clear legal way of choosing a winner.MBC says it is acting on no specific brief in providing Icasa with the analysis, although it admits to being an advisor to “a number of clients who will be affected by the success or otherwise of the SNO process”. Still, there have been grumbles that only two parties can benefit from the delay if both bidders are disqualified – Telkom and state-owned broadcast signal distributor Sentech, which has been granted a licence to operate limited telecommunications services. Smuts was MD of Sentech before joining the broadcasting regulator that later became Icasa.Whatever its motivation, the MBC analysis provides what is arguably the most independent comparison between Goldleaf and Optis.MBC breaks down the invitation to apply to be a bidder into 30 specific criteria that must be met. It fails Goldleaf on a couple of those points, and finds Optis non-compliant in 15 instances.And Esi-Tel, while mostly focusing on discrediting Goldleaf, saves much of its venom for the Optis bid which it says shows “numerous errors and failure to submit coherent and cogent business, financial and technical plans”. Bidder troubleGoldleaf was identified as the favourite even before the bids were made public, mostly because of the experience of individuals involved in it and its strong ties to both British Telecoms and local cellular operator MTN.In fact, consortium members have all but admitted that it is virtually a front for MTN, which declined direct involvement for fear of draining resources already strained by investments across Africa. MTN did, however, fund much of the research on which the Goldleaf bid is based and could take up five percent of the SNO if it wins.However, all Goldleaf`s agreements with BT and MTN are non-exclusive – and those arms-length relationships seem set to haunt it.As Optis, Esi-Tel, Transtel and MBC point out, a key government requirement was that at least one company within a consortium bidding for the 51 percent be an operator with 500 000 customers. Goldleaf lacks that, but does not see it as a problem; its lawyers believe communications minister Ivy Matsepe-Casaburri officially reduced the requirement to an indication of experience within the consortium.The lawyers at MBC disagree, saying Matsepe-Casaburri does not have the legal power to alter the initial requirements on her own, even if she wants to, and that disqualifies Goldleaf.Either way Goldleaf`s problems are nothing compared to those of Optis. Seen as an also-ran bidder from the start, Optis has managed to compound a deeply flawed bid – a rush job if ever there was one – with continuing secrecy and uncertainty.Besides confusing South Africa with Mozambique, a problem not often seen in business plans, the bid document is undermined by gaffes such as offhand references to Cell C, which claims never to have heard of it, and individuals who do not exactly inspire trust. The controversial high-flyer Seth Phalatse apparently owns ten percent; the even more controversial Trevor Tutu is listed as a company director and although Optis says he resigned before the bid was submitted it does not document the fact; the largest shareholder at 30 percent is an 18-year old that Goldleaf points out may be still legally a minor, and next to nothing is known about the Friedland family which controls 73 percent of the consortium.The only fact in its favour is the involvement of Shanghai Telecom, a subsidiary of the recently listed China Telecom, which meets the 500 000 lines requirement. However, even that has been attacked, as Shanghai owns only six percent of the consortium and can barely be seen to be involved in the bid.In an attempt to counter its bad image and better its chances, the consortium is now busily rearranging itself and putting on a show of strength.Consortium representatives say new parties will come on board and take the lead before Optis and Goldleaf are subject to public hearings in mid-December. They could not provide more details at the time of going to print, but it is understood that at least one technology outfit and one financier will be involved.Optis`s reluctant spokesman, Alan Friedland, who along with his son Warren and daughter Monique has majority control, has been removed as front man – albeit not before accusing ITWeb of conspiring with Goldleaf to devise negative coverage of his group.Instead, Optis played up its strengths and presented technical representatives from Shanghai Telecom to journalists, “to show that they exist” according to a new spin doctor.The delegation, although technical and not qualified to comment on the business of Optis, managed to lay one suspicion to rest. Shanghai Telecom is indeed actively involved in Optis, they say, although it played no part in constructing the bid document nor examined the network already put in place by Esi-Tel and Transtel. Top-level approval could not be obtained in time for this.Now, says Shanghai deputy chief engineer Zhang Jian, the company has “clear orders from China with full commitment” to the project. The Shanghai technical team is to continue providing support for the bid and a business and financial team is expected in the country soon.If the 500 000 line requirement were excluded, rating Shanghai against the Premier Contracts Agency (PCA), the largest shareholder in Optis, could be interesting.The Shanghai representatives hint that funding may be forthcoming from their mammoth parent – although they will commit to nothing. PCA, a small firm, can only procure outside financing. On the other hand, Goldleaf points out the potential cultural problems of having a management group of Chinese nationals and the general lack of experience Shanghai has had in setting up competition to an incumbent in Asia. The competitive edgesWhile PCA is not an operator, its trump card is the experience of its individual members, until recently employees of British Telecom, and especially their long association with South Africa. Although mostly British citizens, they were involved in the Thintana consortium, now a shareholder in Telkom, before BT pulled back from it. They also studied MTN when BT considered buying the Johnnic Group in order to split it up; and likewise worked with Eskom when it considered investing in Telkom Kenya.PCA, in fact, says it has a “close working relationship” with and mutual admiration for, the Eskom telecommunications team – contradicting the vehemence of the latter`s opposition to the Goldleaf bid. PCA is tight lipped about the apparent anomaly.“We think we know what the problem is there and we think we can sort it out in private,” says head Peter Archer.The ace up Shanghai`s sleeve is political: the South African government has increasingly close ties with China and is determined to increase both trade and goodwill between the countries. President Thabo Mbeki and his supporters are also keen to gain Chinese backing for the New Partnership for Africa`s Development (Nepad), and the involvement of China Telecom in a venture the size of the SNO would be significant.But before PCA and Shanghai Telecom, or Goldleaf and Optis, can be weighed up officially, it must first be decided if they are worthy to be weighed at all. Although Icasa will be reluctant to reject both bids, it has been cautiously sticking to the most conservative legal opinion it can find – in light of the third cellular licence fiasco. It may decide waiting is better than getting embroiled in legal challenges again.
