THE radio frequency spectrum licensing process could see the entry of new investors in the lucrative telecommunications industry. These could be in the form of mobile virtual network operators (MVNO) and black companies buying interests in existing telecoms companies.

The Independent Communications Authority of SA (Icasa) has invited companies to apply for the most sought-after spectrum licences within the 700MHz, 800MHz and 2.6GHz bands. The spectrum will be used for the roll-out of mobile broadband network infrastructure. This will result in much faster internet speeds.

Icasa requires licence applicants to have a minimum of 30% black equity. It also wants companies that are allocated the spectrum to make it available to MVNOs, which in turn are required to be 51% black-owned. MVNOs piggyback on the existing network infrastructure of mobile operators to offer data and voice products.

There are five MVNOs — Mr Price Mobile, FNB Connect, me&you, SmartMobile, and Virgin Mobile SA, which is foreign-owned. The empowerment equity requirement may result in majority black-owned MVNOs entering the market.

The spectrum licences will be auctioned, with the starting bid set at R3bn. Companies will also have to pay a nonrefundable application fee of R3m.

Steve Bailey, CEO of MVN-X, which connects MVNOs with network operators, says Icasa’s decision has increased the interest in MVNOs. He says the empowerment equity requirement for MVNOs is a “good way to increase black ownership in the sector”.

He says the start-up cost for an MVNO is about R3m, making it “very accessible” to enter the mobile telecoms market.

“I expect investors will partner together in order to take advantage of the opportunity.”

However, he says it is vital that Icasa sets out the terms under which the operators must provide access to MVNOs to ensure fair pricing.

Bailey says MVN-X has already been approached by various parties in a bid to form a partnership.

Black Lite Consulting MD and black economic empowerment (BEE) veteran Ajay Lalu says telecoms companies should be considering improving their black equity ownership, not only from a spectrum point of view, but also from an ICT Charter perspective. “After all, this is a licence to operate issue,” he says.

He expects huge interest from potential black investors, given the strong growth that has been recorded by the companies in recent years on the back of the demand for data. Investors may also be able to raise funds, given the strong growth record.

In 2008, Vodacom SA sold a 6.25% interest to a consortium of black investors including the public, for R7.5bn. MTN’s Zakhele scheme, which owns 4% in MTN Group, was worth R8bn in 2010.

Mergence Investment Managers’ Peter Takaendesa does not expect funding to be a major constraint for potential new investors.

He says funding for these transactions is normally secured by dividends to be paid by the company completing an empowerment transaction.

Vodacom and MTN are continuing to pay attractive dividends, and their balance sheets are strong despite the near-term economic or industry trends. The companies also have a number of competitive advantages as market leaders in most of their major markets, Takaendesa says.

But valuation of unlisted companies, such as MTN SA, Cell C and Vodacom SA is always difficult and subjective, as there is no observable price-making. “This is one of the reasons we prefer empowerment transactions to be implemented at listed group level,” he says.