Huges iTalk deal to go yello

Huge Group says it anticipates its purchase of MTN service provider iTalk Cellular could take longer than expected. This after MTN seemingly changed its mind over its preemptive right to buy the company, which it had last year passed up.

Chief financial officer James Herbst said it would know within 27 days or so if MTN had decided to exercise its preemptive right.

However, if it does so, Herbst does not believe the deal would pass muster with the Competition Tribunal, whereas Huge structured its purchase such that there would be no competition issues.

As a result, he still expects that Huge will succeed in buying iTalk; it would just take a lot longer than originally anticipated if MTN decides to go ahead.

With iTalk, Huge Group would have combined revenues of nearly R1.2bn. It would also diversify the group beyond corporate managed services, where it currently plays. Roughly 46% of revenue would come from corporates and the rest from consumers.

But, the value of the deal was more strategic than this; it would enable Huge to offer its corporate customers handsets and enable it to significantly expand iTalk's distribution channel, among other things, Huge CEO Anton Potgieter said.

Maiden

Reporting its maiden results since listing on the JSE's AltX in August last year, Huge had revenue of R243.5m and headline earnings a share of 44.15c to the end of February. It generated R26m in cash from operations.

This only included seven months of trading performance from Telepassport and one month from Centracell, its first and second acquisitions respectively.

Had the period reflected a full-year of operating performance from both assets, revenue would have been R572.2m, the group said.

Potgieter says shareholders should not expect similar top-line growth from the group next year (without taking iTalk into account, which it anticipates will grow at 35% or more).

It would probably report growth of around 12%, or between R630m and R640m. This was out of a concerted strategy to go for the profitable business and walk away from business that could cost the company money, he said.

Still LCR

Although Huge sees itself as playing in the managed telecoms space, the bulk of its income still comes from least-cost routing (LCR), which involves helping companies to save money by routing calls over the cheapest path at any given time.

The biggest players in the industry are Vox Telecom, then Huge, Nashua Mobile, Autopage Cellular, followed by Telemasters and Intelegence.

There have been some questions over the continued viability of this industry, given that regulator Icasa is expected to impose price cuts on the rate that the operators can charge each other for connecting calls from one network to the next (cellular interconnect is much more expensive than fixed-line).

However, Herbst said LCR was based on the principle that on-net calls - for example, a Telkom to Telkom or MTN to MTN call - would always be cheaper than breaking out to another network, so even if interconnect rates came down, there would still be a market for its services.

He also believes that drop in margins will be outpaced by an increase in volumes.

LCR market to double

Huge predicts the LCR market will more than double from a R3bn industry currently, to around R7bn: "There's no way this market is saturated."

In addition to its LCR offering, Huge also has a number of other products in its quiver that it can use to help save customers money on their corporate telephone bill.

These include software that monitors abuse in terms of employees making private calls at the office. It can also help companies use SMS rather than making voice calls through a product called texSMS, which sits as a button in Outlook.

Another product, called CallTrigger enables employees that are on the road to get the office to call them back at a cheaper rate than they would pay. It was also more efficient than the employee having to later claim back their airtime costs incurred on work-related calls.

Huge is also very excited about the 25% (plus one share) stake that it recently bought in mobile advertising start-up Eyeballs Mobile.

Potgieter said everybody was talking about the potential for mobile advertising, but nobody was doing it right. However, he believes Eyeballs has developed the technology to change this, and it could be an extremely significant contributor to Huge's income stream going forward.

No buys

Despite a fairly quick acquisition strategy at the outset - which Huge said it needed to build critical mass in order to get a decent discount from the network operators - it doesn't have any other purchases on the horizon at this stage. "We're not out to build a business by issuing capital to buy revenues," says Potgieter. "Anything we do buy would have to be pretty special," he says.

For a small company, the results presentation, held at the prestigious Summer Place in Illovo, was extremely well attended, although some of the attendees were also staffers. The presentation was extremely detailed and "informative", as one analyst commented during question time.

The shares rose 6.7% to 400c by mid-afternoon trade in the wake of the results being released late morning.

By: Belinda Anderson