DealMakers - 2020 Annual

Digital infrastructure – A sector poised for growth in a virtual world

by Arun Varughese and Chris de Beer

Rand Merchant Bank (RMB) recently facilitated the addition of two high-growth businesses – Octotel and RSAWEB – to The Actis Group (Actis). And, the entire transaction was initiated and completed within the COVID-19 pandemic restrictions and protocols.

 

The year 2020, and the impact of the COVID-19 pandemic, will long be remembered for the way that it has drastically changed lives across the world. As our own country went into various stages of lockdown, millions of South Africans suddenly found themselves confined to their homes, having to find new ways to work, educate children, keep fit and stay entertained. As seemingly everything – including work, education, entertainment and shopping – moved online, the need for high speed internet access went from being a luxury to a necessity. The ability to deliver both affordable and reliable connectivity became a national imperative, as millions of South Africans navigated their way through the pandemic.

The resultant demand for data and online activity was a bright spot for the South African Gross Domestic Product, with the telecommunications sub-segment showing strong growth. Consumer demand and potential growth prospects have not been lost on investors, who have started focusing on digital infrastructure and the companies behind it. Digital infrastructure such as fibre, mobile telephony towers, data centres and undersea cables are all vital parts of the system that allows connectivity. Each element provides defensive consumer demand, annuity revenues, a high growth profile and, ultimately, strong, predictable cashflows.

Arun Varughese
Chris de Beer

Octotel and RSAWEB (together, the Businesses) are two companies which are playing a large and important role in growing South Africa’s digital infrastructure sector. The shareholders of the Businesses successfully built these companies over a number of years, and believed that the time was right to reposition them for the next phase of growth. With this objective in mind, RMB worked with and advised the shareholders of the Businesses on a transaction which would allow them to move into their next growth cycle.

 

Octotel is a leading fibre network provider, operating primarily in the Western Cape, and the third largest open access fibre network in South Africa. Founded in 2016, Octotel has rolled out fibre infrastructure to over 175,000 homes and businesses. Octotel is responsible for all aspects of its fibre network, including the building, maintaining and leasing of its network. RSAWEB is an Internet Service Provider which provides fibre-to-the-home (FTTH) and fibre-to-the-business (FTTB), as well as other connectivity solutions to over 20,000 customers. The Businesses play a pivotal part in building out South Africa’s connectivity ecosystem, and continue to grow rapidly as demand for FTTH increases.

 

It was important to ensure that the Businesses received buyer interest from those who understood the major role each business has to play in the ongoing “build out” of South Africa’s connectivity ecosystem. Actis is a global emerging market investment firm, focused on private equity, energy, infrastructure and real estate, with assets under management of US$10bn. Actis’ investment in the Businesses serves as its first investment in the South African fibre sector, and is an important investment into the high-growth digital infrastructure sub-sector. The transaction positions Actis to continue rolling out fibre networks and participate in the continuing growth of the sector.

 

The transaction took place in the midst of the COVID-19 pandemic and its associated restrictions. All aspects of the transaction had to adapt to a “new normal” with management meetings, due diligence and transaction/Sale and Purchase Agreement negotiations all taking place virtually – a first for all involved. Despite this virtual adoption, the transaction was ultimately concluded in January 2021. The Businesses are now well positioned for the next phase of their growth, as they aim to become market leaders in the open access fibre network and connectivity sectors in South Africa.

 

Ultimately, the transaction was a success for all parties involved. The transaction outcome met the objectives of the shareholders, and Actis was able to add two high-growth companies to its growing digital infrastructure portfolio. Furthermore, the transaction proved that with today’s technology, you no longer need to conduct business with everyone physically present in the same room – a virtual sales process is possible with the right plan and team in place. 

 

Varughese is a Corporate Finance Executive responsible for Private Equity and TMT advisory and de Beer is a Corporate Finance Transactor responsible for Industrials and TMT advisory, both at Rand Merchant Bank.

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