Kristoff Puelinckx, Delta Partners

Delta Partners, the Dubai-based telecoms advisory firm and private equity fund, set up an office in Johannesburg earlier this year to capitalise on the growing interest in South Africa and the continent’s burgeoning telecoms industry.

The group has now launched an $80m fund to invest in telecoms firms in Africa, as well as other emerging markets. TradeInvestSA spoke to Managing Partner, Kristoff Puelinckx, to see what effect the recent deregulation in South Africa's telecoms sector may have on the industry.

What kind of telecoms businesses are you looking to invest in?

We are looking at specialised retailers and distributors that are growing exponentially, and everything that’s in the middle from alternative telcos and call centres, to data players and wimax players. All these kinds of second tier companies is where we are focusing our investment fund. We believe a lot of the growth has already been priced into the stock prices of the telecoms operators; but we believe the second wave of value creation is really going to be in this second tier of players.

Is there a timeframe for investing the fund and do you have plans for any more?

We have $80m, and there’s a part that’s already invested. I think our investment period runs until mid-2010; but our target is to invest the rest of the fund probably in the next 12 to 14 months.

We’ve made three investments so far, I think we will do another 6 to 8 and at least one or two of those should be in South Africa and another one or two in the rest of Africa. We have one in North Africa right now already.

I think during the course of next year – depending a bit on how the financial markets are evolving as well – we expect to start work on a second fund, which I expect to be a bigger fund. Hopefully we can launch that in 12 to 18 months I would say.

Do you take an active role in your investments or are you a silent partner?

We’re very active; our business model is an integrated model where we have a traditional specialised telecoms consulting business, but we also have our private equity fund. We’re based in more than 30 countries, so we have a lot of specialised people that we can use to deploy in our portfolio companies. We do not want to replace management; we want to work side-by-side with existing management. We definitely support them at the board level but also at the management level. So we see ourselves taking an active role, and that’s typically why people look to us for investment, not just because of the money, but also because of our expertise and the relationships and networks that we bring.

South Africa must be very mature in terms of telecoms in Africa. Where are the best investments?

Every stage of the market creates different opportunities. I mean right now you’re right, South Africa is mature but that does create specific opportunities around the businesses in South Africa. There are great call centre businesses, and alternative telco’s, which are doing well, and have a lot of potential to grow beyond South Africa.

I think in broader Africa we’re really looking at some of the bigger markets. So we’re considering transactions right now in Nigeria, Kenya, Ghana, Uganda, obviously the North African countries Morocco, Algeria, Egypt, actually our third investment is in a regional player in the Middle East and North Africa but its based in Egypt. So, I think we’ll typically look at some of the bigger markets.

"I think now more than ever you need a really expert investor, someone who really understands the industry to make the right investment decisions because its also obviously more risky."

Is now a good time for funds, in terms of acquiring undervalued companies?

I think, definitely it’s a good time, but I think now more than ever you need a really expert investor, someone who really understands the industry to make the right investment decisions because its also obviously more risky. Valuations are low but they can go lower and companies can go bust in this kind of environment. So, I think that’s why what you’re seeing is the more generalist funds sitting on the sidelines waiting to see what happens, whereas specialised funds like ourselves are very active now, because we do truly believe there are more opportunities now, at better valuations, than there were 12 months ago.

Altech won its recent court case against the government, opening up the telco market for smaller players. What effect do you think this ruling will have?

I think a lot of these facts are overstated, but what I would say is that having been involved in a lot of deregulation around the world, generally in the telecoms market you need to be careful not to deregulate too quickly. And that’s why I understand the minister appealing, because I think it’s in the government’s interest to have a more staged deregulation. What you don’t want to have is a situation where you open up the market for everyone and the players who really have the capacity and the capital to invest are going to stop investing because they can put their money to better use in another market.

To be more specific, the bigger operators, they all operate across Africa, so if you totally deregulate South Africa, they’re going to say “look rather than putting a hundred million more in a network in South Africa, I’ll put it in Nigeria, the DRC, or Ghana, or Rwanda,” and that’s the risk that the country has. In South Africa there is a decent telecoms infrastructure but there’s still a lot of investment to be made, so I think that’s really being put at risk. Having said that I think also this ruling really will benefit a handful, maximum a handful, of alternative players who can really get the money together to build a serious play.

Do you think the laying down of SEACOM will have much of an effect?

I think SEACOM for sure will help. There’s still a lot to be done in the broadband market and in the end prices are still too high, and they need to come down. And partially they’re driven by the cost of international connectivity, so once that cost comes down then part of that saving can be passed on to the end consumer. But I think, both Neotel and Telkom, have a big opportunity ahead. I think the fixed-line market, the broadband market, is very underdeveloped in South Africa, related to that, managed services focused on the big corporates which is typically the space where these type of players will play as well, is a big opportunity.

I think Neotel has made a relatively slow start, but they are in as good a position as anyone else to go and get the market. They’ve made significant investment, and I think now they need to shift their focus from building their network and investing in technology, to focusing on the commercial side and getting the market and getting the customers. So that’s a shift in management that we would expect to see there.

"If you totally deregulate South Africa, the bigger operators are going to say 'look rather than putting a hundred million more in a network in South Africa, I’ll put it in Nigeria, the DRC, or Ghana, or Rwanda,' and that’s the risk that the country has."

Do you think there will be more interest in the telecoms sector from foreign investors?

I don’t know. I think one thing is financial investors like ourselves, again the specialised players, will see it is an attractive market. Generalist funds will be scared off by the drop in the currency, the drop in the public markets etc. So that will take time to regain confidence with broader international investors. I think in terms of strategic buyers or industry buyers, South Africa has been stated as an attractive target market to complement a portfolio of some of the bigger international or retail groups, and I think that will continue to be there.

Vodafone is already taking control of Vodacom, and MTN, it’s always a question. MTN is a very attractive asset, it’s cheap right now. The question is whether existing shareholders will want to sell, but by definition it’s a very attractive market for any international group, for its South African operation, but also for its broader group operations across Africa and the Middle East.

The Government has been criticised for retaining stakes in Vodacom and Telkom. What is your view?

Vodacom is already in a developed market so I don’t see the need. I think in Telkom, I’m all for the government [keeping a stake]. A critical part of the development of the South African economy is the development of its infrastructure. There is not a good enough fixed and broader telecoms infrastructure in place, so if you have the government as a shareholder at Telkom, I think that could be beneficial to the extent that the government as shareholder understands the need for building a competitive player with strong commercial offers in the market, investing in new networks and building the infrastructure.

I think if they take the view that this will help the critical economic development of the country and as such can support and even invest in Telkom I think that’s a positive. To the extent that this will put a brake on the further opening up of Telkom I think it’s a negative. But I think there’s a rationale to be built for it and the question is more “Is the government up to really pushing this to become a very competitive and economically viable player?”

Because if they do that, they can attract more investment to it, which will eventually benefit the infrastructure in the country and will benefit the broader economic development, so yes, I do think they have a role, they just have to make sure that they put on an economic hat rather than a pure political hat.