The Competition Commission ("the Commission") considered two large telecommunications mergers this year and made diametrically opposed recommendations to the Tribunal. MTN wanted to acquire Telkom and Vodacom proposes acquiring Neotel.

The transactions have similar competition challenges but the Commission recommended approval of the Vodacom deal but prohibition of the MTN transaction.  The fascinating question is “why”?

The Commission was notified of the Vodacom transaction on 18 July 2014. Vodacom wants to buy 100% of the shares in Neotel. Post merger Neotel will be one of Vodacom's wholly-owned subsidiaries.  Vodacom motivated approval of the transaction on the basis that it combines complementary businesses, namely Vodacom's mobile network operations and Neotel's fixed line services. Vodacom argued that Neotel's business will enable it to compete effectively with Telkom in the fixed line services market. But it seems that Vodacom is really after Neotel's spectrum assets. The Independent Communications Authority of South Africa ("ICASA"), the telecommunications industry regulator, is not issuing any more spectrum licences. That means that mobile network operators have to either maximize efficiencies in their existing networks or buy additional spectrum by buying competitors to whom that spectrum has been licensed. Vodacom needs Neotel's spectrum for its long-term evolution (LTE) or 4G mobile network. The Commission's report acknowledges the serious competitive risk posed by the combined entity if Vodacom is able to get the jump on its only real competitor, MTN, in the LTE arena. The Commission specifically identified as a competitive risk the first mover advantages resulting from the merger and acknowledged that the merged entity would have significant market share in the mobile network market.

The Commission appears to have accepted Vodacom's argument that Neotel's assets will enable it to compete with Telkom because this is identified by the Commission as a procompetitive benefit resulting from the transaction. The critical conditions which the Commission negotiated with Vodacom include that:

• Vodacom may not retrench any Neotel employees;
• "Vodacom may not use Neotel’s spectrum for 2 years in order to allow for spectrum equalisation in the industry – there are indications from the relevant government departments that plans are underway to introduce and implement a spectrum policy in South Africa;
• An independent third-party will be appointed, at Vodacom’s cost, to monitor the implementation of any spectrum deferment remedy;
• Vodacom and Neotel commit to invest R10 billion over 5 years in relation to fixed line infrastructure – these investments are likely to provide stronger competition to Telkom. At least 50% of the committed investment amount will specifically comprise investments in all fixed network elements required to enhance services to homes and enterprises in South Africa, including the development of value adding services; and
• Within 24 months of the approval date, Vodacom is also tasked with ensuring that its share capital held by Black Economic Empowerment (BEE) shareholders will increase by an amount of R1.4bn".

The key condition is that “Vodacom shall not directly or indirectly use Neotel’s spectrum for the purpose of offering wholesale or retail mobile services to any of its customers for a period of 2 years from the Approval Date or 31 December 2017, whichever is earlier… “.  The 2 year deferment period is intended to give an opportunity to policy makers to address the spectrum challenges in the industry. The Commission seems to think that this process will be concluded within the 2 year period because, says the Commission, relevant government departments have indicated that “plans are underway to introduce and implement relevant policy”.  Given the Government’s recent history of failing to meet critical deadlines, this is far from reassuring. 

What is particularly interested is that it appears from the application before the Competition Tribunal to which ICASA was party earlier this month, that ICASA disagrees with the Commission. ICASA asked the Tribunal for access to the Commission's confidential material in its Vodacom merger investigation file as a first step in its intervention in the Vodacom merger hearings scheduled for November this year. Apparently ICASA thinks that the conditions negotiated by the Commission in the Vodacom transaction will sterilise spectrum which is in short supply for 2 years without effectively addressing the anticompetitive risks posed by the Vodacom deal. ICASA has suggested alternatives to the Commission's conditions and it wants to monitor Vodacom's compliance with any transaction conditions itself instead of relying on the Commission as watchdog.

And the MTN transaction? The Commission's media release dated 17 August 2015 recommended that the MTN transaction be prohibited. In a transaction aimed at giving MTN access to spectrum just like the Vodacom deal, MTN proposed taking control of Telkom's radio access network assets and allowing both parties' customers to roam their respective networks in terms of management and roaming agreements. The key was that those agreements gave MTN use of extra spectrum licensed to Telkom which MTN could use to roll out its LTE or 4G network.

The concerns which the Commission expressed about the MTN transaction and which ultimately justified its recommendation that the transaction be prohibited were very similar to the issues it raised about the Vodacom deal. The Commission was of the view that the access to additional spectrum capacity which MTN would obtain through the transaction would give it "first mover" advantages "relating to network speed, capacity and mobile offerings. MTN would be able to gain a significant competitive and time advantage, offering network and services that cannot be significantly constrained by rivals, particularly given the market position of Cell C and Telkom Mobile". This was also because a critical element of the transaction was that Telkom's mobile data capacity was limited but MTN’s capacity was not. The upshot of all this was that the Commission recommended that the transaction be prohibited.

How does the Commission reconcile the difference in its approaches to the 2 transactions? Apparently MTN was not willing to agree to conditions acceptable to the Commission.

The upcoming Vodacom merger hearing before the Tribunal will be intriguing, not least because it is the first battle ground in the developing turf war between ICASA and the Commission.