Dark Fibre Africa (DFA) is the broadband infrastructure arm of Remgro, one of the best performing investment companies on the JSE. Being a privately held business, it’s not often that one gets a look beneath the covers at DFA. But ahead of its R450m investment in DFA’s recent R3.5bn debt issue, Futuregrowth Asset Management’s Paul Semper got that opportunity. He shared his learnings with me this afternoon. – AH
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ALEC HOGG: This undictated podcast is brought to you by Futuregrowth. Paul Semple from Futuregrowth joins us now. Paul, we’ve seen an explosion in Internet access…certainly, of broadband in South Africa. It’s an area that you’ve been following closely.
PAUL SEMPLE: Yes, we have and we’re very pleased to have recently partnered with Dark Fibre Africa as one of their main funders.
ALEC HOGG: Tell us about Dark Fibre Africa. It came to the public attention a while ago, but it’s been quiet for a while.
PAUL SEMPLE: Yes, Dark Fibre Africa is a company, which lays fibre optical cable throughout South Africa, but predominantly in the metropolitan areas. This fibre optical cable basically transmits data for the telecommunications industry. For you and I it means faster Internet access.
ALEC HOGG: And the shareholders in the company?
PAUL SEMPLE: It’s a privately owned company, but the major shareholder is Remgro.
ALEC HOGG: Not a bad shareholder to have as a partner there. How did you get invited?
PAUL SEMPLE: Well, this deal was indicated to us by an arranger. It was actually syndicated to the market, so Futuregrowth, on behalf of our pension fund clients, put money in, alongside the banks and some other institutional funders.
ALEC HOGG: What’s it capitalised at now?
PAUL SEMPLE: Dark Fibre Africa has a capital base of R6bn. Together with our other funders, we provided R3.5bn of debt to the company.
ALEC HOGG: All right, so from an equity perspective, do you have any interest?
PAUL SEMPLE: No, we don’t have any interests. We would like interest, but as I say, it’s a privately owned company at this stage.
ALEC HOGG: Remgro are keeping the equity to themselves, but they are looking to you to help them fund the process. R3.5bn is a big slug, even for a big group like yours.
PAUL SEMPLE: Yes, well we’re providing part of that. On behalf of our clients, we provided R450m of that R3.5bn. That’s spread over three to six years in duration and hopefully, we’ll remain invested and that the company will continue to roll this debt.
ALEC HOGG: You don’t make a decision like that lightly. Just take us through your due diligence process.
PAUL SEMPLE: Okay, first and foremost we always like to take a view on the management of this company. As you’ve already mentioned, they have a great shareholder in Remgro and they have a very strong board of directors. We’ve met with the company on a couple of occasions. We’ve looked at their operations. We’ve gotten a lot of comfort from their track record that they’ve been able to establish over the last seven or eight years. A lot of our work also went into the legal contracts. Often, there’s a risk that details could be missed in these legal contracts and it’s important to Futuregrowth as well, that are clients are pay [unclear 03:33] in all respects with other lenders, particularly given that this was a syndicated investment, so those were our main areas. Of course, gave a lot of time and attention to the financial side of the transaction as well.
ALEC HOGG: Is it making money yet? Paul, is it safe enough in that it is a profitable enough entity?
PAUL SEMPLE: Oh, yes. Dark Fibre Africa is a profitable entity and it has a great track record. As lenders, we’re very pleased to be involved in this company as well.
ALEC HOGG: What are they going to use the R3.5bn for?
PAUL SEMPLE: First and foremost, it’s being used to refinance their existing or previous project finance debt, but there’s also a bit of headroom in the facility to allow them to grow and to continue to roll out this network infrastructure that they have.
ALEC HOGG: At the moment…that infrastructure – is it primarily in the metropolitan areas?
PAUL SEMPLE: Yes, primarily in the metropolitan areas. They provide the links between the base power stations for the cellphone companies and they are creating more and more links. Although they’ve basically covered most of the metropolitan areas, there are more base stations going up and they’re able to just increase their coverage of these areas.
ALEC HOGG: I’m sure you followed the travails, certainly, in the early days of C-Com. It wasn’t an easy path, but they do seem to have settled down now. The industry as a whole – is there still a lot of potential for growth in this sector?
PAUL SEMPLE: There is not a lot of potential for growth in the metropolitan areas, mostly because these areas have already been covered, actually mainly by Dark Fibre Africa, but there are other infrastructure providers as well. I would say the most growth is probably in outlying areas – in the rural areas – and I think there’s a lot of opportunity for new players to come in there. Dark Fibre Africa is also rolling out their infrastructure to those areas.
ALEC HOGG: That was my question. As far as the rural areas are concerned, are there any particular parts of the country that they’ll be focusing on?
PAUL SEMPLE: Not any particular areas that I can mention right now, but just generally closer to the metropolitan areas and then moving out, of course. That would be the optimum way to go.
ALEC HOGG: So we’ll see this return on this investment in the speed of Internet access. If you go back a few years – and I’m sure this did come up in your research – how much have we improved in South Africa, on that front?
PAUL SEMPLE: Alec, we’ve come a long way over the last five or so years in particular, but there’s still a long way to go. I think businesses are benefitting the most right now from this roll out of the fibre optical cable as most businesses are connecting onto this, but it’s really the private homes that have a much longer way to go. There are initiatives taking place to connect homes to the fibre optical network. That’s probably a longer-term project by the country, and we’re probably looking at the next three to five years for that to happen.
ALEC HOGG: And the benefits of having those homes connected, for a company like Dark Fibre Africa…
PAUL SEMPLE: Well, the benefits are increased usage of their cables, particularly for the telecommunications customers that lease this capacity from Dark Fibre Africa. There’s a huge amount of capacity in this network and really, only a marginal amount is being used. The more customers that sign up – telecommunications customers that DFA has – the more capacity they’ll use, of this network.
ALEC HOGG: Please explain that again if you would, Paul. Dark Fibre Africa actually doesn’t sell directly to consumers, but it goes through the mobile companies.
PAUL SEMPLE: Yes, that’s correct. It leases capacity or usage really, of its network to the industry – most of the mobile operators as well as the Internet service providers.
ALEC HOGG: So the money that it would be raising now would be just to increase that network that it already has installed.
PAUL SEMPLE: That’s right.
ALEC HOGG: How many kilometres are currently installed?
PAUL SEMPLE: Right now, they have installed over 8000 kilometres around the country. As I say, it’s predominantly in the metropolitan areas.
ALEC HOGG: And a big driver, I guess, for getting South Africa into the Internet age – rather belatedly – but we certainly seem to be there now.
PAUL SEMPLE: Absolutely. Apart from the benefits of increasing Internet speeds, Dark Fibre Africa promotes competition because of its ability to lease out its capacity to the market. This eliminates duplication by the different telecommunication providers in laying down their own networks and this effectively reduces overall costs in the industry.
ALEC HOGG: Paul, on your R450m that you’ve invested on behalf of clients, what kind of returns are you being guaranteed?
PAUL SEMPLE: Well, we’ll be charging interest rates on the debt that we’ve loaned, but that is very much in line with the banks’ interest rates and it’s a risk-adjusted rate.
ALEC HOGG: Which means…
PAUL SEMPLE: Well, I can’t divulge the exact cost of the funding, but it is a market-related rate.
ALEC HOGG: Paul Semple is with Futuregrowth and this undictated special podcast was brought to you by Futuregrowth Asset Management.
