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Telkom, BCX deal gets a nod, conditions apply

By Gugu Lourie

The South African competition commission gave its conditional approval to the R2.7 billion Telkom-Business Connexion (BCX) deal on Thursday clearing the lines for the deal that has been in the pipeline for almost a year.

The competition watchdog wants conditions attached to the transaction.

“We believe the proposed acquisition will assist Telkom with its strategy to grow beyond its core business of connectivity by expanding into ICT services.  This will enable our business to further enhance and grow its existing offerings, while at the same time providing scale in IT services. It will also help to reinforce the company’s core connectivity business and enhance Telkom’s convergence strategy,” said Sipho Maseko, Telkom boss.

Maseko said the proposed transaction will leverage Telkom’s expertise to further address the technology and telecommunications requirements of all the company’s clients and customers in South Africa and elsewhere in Africa.

Maseko also affirmed that Telkom intends to remain a long-term investor in Business Connexion.

“We believe that working together with Telkom will improve our customer value proposition through a greater ability to provide integrated end-to-end ICT solutions and a more global and competitive offering, particularly on the African continent,” said Isaac Mophatlane, Business Connexion Group CEO.

Isaac Mophatlane, Business Connexion Group CEO
Isaac Mophatlane, Business Connexion Group CEO

The commission found that Telkom, being the largest provider of wholesale leased lines to downstream customers, has the ability to foreclose its downstream rivals from access to these wholesale leased lines which are essential inputs for the provision of downstream services including managed network services (MNS), value added network services (VANS), hosting and information technology services (ITS).

It also found that the merger will result in the merged entity having the ability and incentives to engage in bundling strategies that may result in anticompetitive effects.

On public interest issues, the commission found that the merger will result in employment losses of up to 60 employees over a 3  year period.

To address the concerns, the commission recommended certain behavioural and employment
conditions.

“Among the behavioural conditions, is that Telkom’s application and implementation of the Transfer Pricing Programme, should explicitly include fibre access, and remain in force for the duration of the condition period.  Consequently, the tenure of the Transfer Pricing Programme will be extended from 18 July 2018 to 31 December 2020,” said the watchdog.

In relation to competition concerns arising from foreclosure of downstream rivals through bundling strategies, Telkom will among other things:

  • Ensure that the prices for wholesale leased lines are based on actual lines utilised and priced at the non-discriminatory transfer price for common components.
  • Ensure that the prices for the other services and/or components included in the bundle are based on actual costs incurred.
  • Ensure that it does not set prices for its bundled offerings using wholesale leased lines at levels which are less than the sum of the costs of components in the bundle. In other words, the principle is that the prices for wholesale leased lines included in the bundle must exceed the cost applied in internal pricing and the revenues generated from the bundled offering must exceed the costs associated with providing the bundle plus a positive margin
  • Ensure that when providing any bundled offering which includes wholesale leased line, the price complements for each individual service included in the bundle is clearly reflected in the overall price for the bundle.

To address the employment concerns, the commission recommended that a condition be imposed limiting the number of employment losses arising as a result of the merger to a maximum of 60 employees. Such employment losses shall be limited to a maximum of 20 employees per year in each of the 3  years.

The South African Competition Tribunal will set the matter down for hearing in due course.

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