UPDATE 2-South Africa's Vodacom to challenge regulatory price cuts

Wed Feb 5, 2014 12:38pm EST

* Fee cuts would cost 1 bln rand in the coming year

* Vodacom says cuts ignore its network investment

* Expects decision on Neotel deal within weeks

By Helen Nyambura-Mwaura

JOHANNESBURG, Feb 5 (Reuters) - Vodafone's South African business is to launch a legal challenge against regulatory price cuts that could cost it as much as $90 million in the coming year, the company said on Wednesday.

After reporting a 10 percent increase in third-quarter revenue, Vodacom Group also said that it is close to finalising negotiations with India's Tata Communications over the purchase of its Neotel unit.

Vodacom has the largest customer base in South Africa and is expected to be the hardest hit by the government's plans to halve the fees mobile companies can charge each other to use their networks.

The cuts are expected to squeeze the earnings of the biggest players - who have also invested the most in their networks - while helping smaller companies such as Telkom SA.

"We have concerns about the process used to determine these published rates. So we intend to challenge the legal validity of the process used," Chief Executive Shameel Joosub said on a call with analysts, adding that the cuts could cost it 1 billion rand ($90 million) in the next financial year.

The Independent Communications Authority of South Africa (ICASA) last month said that it would cut the rate a company can charge rivals for using its mobile network to 20 South African cents per minute per call from Mar. 1, with a further reduction to 10 cents by March 2016.

The regulator says that such fees can deter competition if they are too high, while Vodacom says the cuts do not take into account the cost of running its network.

Though dwarfed on the rest of the African continent by rival MTN Group, Vodacom is still the dominant player in South Africa.

MTN is expected to fare better from the rate cuts, given its diverse geographic base and the high level of pre-pay users among its South African customers. Pre-pay customers typically tend to maintain the same spending levels when prices drop, taking advantage of the lower rates by talking longer.

NEOTEL DEAL

Joosub said that negotiations over Neotel are at an "advanced stage" and it is confident an agreement can be reached with Tata Communications in the coming weeks.

Vodacom said in September that it was in exclusive talks to buy the unlisted South African company - a deal that would give it a large fibre-optic network for high-speed Internet, a significant boost for its plans to increase its data business.

The company's results for the three months to Dec. 21 showed a 40 percent jump in data revenue, contributing 3.6 billion rand as total revenue climbed by more than 10 percent to 20.2 billion rand.

Vodacom, which also has operations in Mozambique, Lesotho, Nigeria, Tanzania and the Democratic Republic of Congo, is also trying to beef up its presence across the continent.

It increased its customer base by more than 12 percent in its third quarter, bringing its total of active users to 56 million.

The company's shares closed 2 percent down at 117.42 rand.

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