Vox Telecom has become a major telecommunications player in South Africa’s market, offering highly competitive fixed line internet and voice services. Over the years, the company has dramatically expanded its offerings and footprint thanks to acquisitions that include its deal with fibre infrastructure provider FrogFoot. Throughout this journey, Rand Merchant Bank (RMB) Ventures has been a key shareholder in Vox and has helped to shape the telco’s strategy. In this interview, the CEO of Vox, Jacques du Toit, together with Cassim Motala, explain the history of their journey together. – Gareth van Zyl
It’s a pleasure to welcome RMB Ventures’ Cassim Motala and Vox Telecom Chief Executive Officer, Jacques du Toit, on the line with me from Johannesburg. Gentleman thanks for joining me.
Let’s take a step back. Back in 2011, RMB was part of a group that bought a stake in Vox. Can you talk me through the journey? When did RMB come on board and how did RMB impact the strategy of Vox? Obviously, we’ve seen this boom in fibre broadband and the tailing off of copper lines, but how does a shareholder like RMB help drive that change?
Cassim: We were invited by Metier (the current shareholders at the time in a listed format) to be part of the listing of the business. We then joined the consortium in order to delist the business from the JSE. We started working with the management team around where to go from there. Jacques could tell us more about what the business looked like then and where we are now.
Jacques: In 2008 (and I’m going back quite a bit now) the market became deregulated. Before 2008 we only knew one fixed-line telecommunications brand and that was Telkom. A lot of chaos was introduced between 2008 and 2012 when things started to settle down, but there was one thing that was quite obvious: if you were an operator that played in only one space (i.e.: you were either a PABX vendor or a standalone Internet service provider) your chance of survival was minimal.
Two things happened in our industry. One, we started to see a massive price deflation and, two, we started to see the consolidation of various ICT services. For Vox to then reposition itself and recreate its relevance with customers, we said let’s do two things. We’ll embrace deflation both in voice and data services and we will start to play the role of an integrated service provider: that is, owning infrastructure and then layering services on top of that.
It’s amazing to see how when you become a more vertically integrated operator, your relevance with customers steps up quite a bit because your customers now had one point of contact. You’ve taken out all the middlemen and the cost savings benefit gets passed through to the customers. Added to this, the fact that you own the products end-to-end further means that you can make changes on the fly that are not dependent on an outside product owner all the time.
How did that then impact how you created your Vox bundles that we see today, as well as other aspects such as your self-service, online sales, your back office and billing etc.? Because I presume that this all led to that being changed and shifted as your journey has continued?
Jacques: The first step to change was the introduction of our new shareholders in 2012. RMB would often ask us: ‘Guys how are you going to survive this journey?’ ‘How are you going to fight the big boys: the monopoly players, Vodacom, Telkom, MTN and Neotel (at that stage, today we know them as Liquid)?
That helped us to reinvent ourselves by saying that is not a T20 match, it’s kind of a five-day test match. Whatever decisions we were to make had to make it difficult for competitors to follow and ensure sustainability.
The first step was to invest in infrastructure. When the market deregulated we were able to deploy our own infrastructure. The shareholders assisted us with acquiring the fibre network company FrogFoot Networks (based in Cape Town). That was key. When you own the underlying fibre in the ground, you can start bundling services on top of that infrastructure.
Cassim: We also asked questions about if the business was organised correctly. At that stage, we were set up as five different divisions targeting different customers. We had five different systems. We consolidated billing systems and we started to look at the customer holistically. We then asked which products should and shouldn’t exist; what could we bundle to add more value to customers and how we could think about the consumer or the small business in a different way.
We started pushing the management team around to ask if there are cost savings to be had, and if so, how to do that? Other questions centred around the ideal positioning for this business in order to compete and the sources of disruption. We needed to know what the larger telecoms pain points were and how we could target them. Our management team then came up with a few innovative ideas such as fixed billing and permitted billing versus just doing all-inclusive packages.
Jacques: I remember one of the things Cassim asked in the earlier days was, ‘how do you determine if your product has the right to exist?’ To this day, once a quarter we will go through three questions: Is this product on a deflationary trajectory? Can we sell it to 60% of the base and does it span across our consumer and corporate or just one or the other?  That really determines if we knock a product off the product sheet or if we keep it on there.
It’s quite challenging operating in an environment where there is deflationary pressure. We’ve seen the likes of fibre services becoming far more ubiquitous than what they were five years ago and that’s had certain price pressures. It’s a highly competitive market now, isn’t it?
Jacques: To give you an example, in 2014 the voice component of the combined businesses contributed 80% of our margin. Last year it contributed 18%, and next year it will only contribute between 8% and 12%. I think that if you’re a provider that makes your money out of voice and data alone, your days are numbered. The world will get to a point where voice and data are for free and the only way that you could make money would be by layering value-added services on top of that.
Cassim, I’d like to bring you in here again. What Jacques has mentioned is incredibly interesting. How do you as RMB actually make sense of all of this? You’ve given us some insight into the discussions that you’ve often had, but how involved has RMB been? Do you meet with them regularly and how does that process take place as a shareholder?
Cassim: The first thing that I must stress is that we’re also part of a consortium. That means that we and three major shareholders sit down and do everything together. It’s important for us to be in a partnership. Each partner brings something different to the dynamic and collectively we spend our time with the business.
As a private equity investor, the typical thing for us is to sit on a board and attend monthly meetings with the business to have a catch up. With Vox we’ve spent a little more time on that because of the radical change that we undertook. We first slowed the process down to explore all the options in terms of deciding on the strategy, and then we applied several measures of discipline and rigor around the management team. For instance, they would come back to us and say, ‘Hey, if we do this, what does that look like? Can we quantify it? What will that investment take? What kind of returns can we do? Why would this add to our competitive advantage or not?’ and so on.
We often had quite heated debates between us around what the right path would be. When we are doing something as radical as this, this type of debate is necessary in order to arrive at the right outcome.
In the end it came down to two or three strategic choices we needed to make. We agreed on the acquisition of FrogFoot and to invest in infrastructure. We backed the management team to execute on that plan. We also advised on implementing metrics to work out what the returns would be and what success would look like.
Jacques: The strategy that we decided on in 2012 wasn’t a quick six month ‘implement-the-following’ type of approach – rather a roadmap that was painted. It started off with the FrogFoot acquisition, followed by another acquisition that entailed the managed IT services space. We then acquired a company called Braintree that was in the Microsoft world focusing on OSS and BSS systems.
While being on the journey we continue to ask ourselves: ‘how do we maintain our relevance and be disruptive?’. Relevance in this regard is sometimes achieved through acquisitions and sometimes through our own developed products.
The other thing that’s interesting in terms of the relationship with the shareholders is that we attend statutory board meetings with monthly updates in an informal, come-for-a-breakfast talk about the business. This is where we bounce ideas around. While it can be quite challenging at times there is always room for healthy debate.
Jacques, I’d be interested to know what drives your acquisitions strategy. You’ve mentioned some of them, FrogFoot etc., but what do you look for considering that there is always a risk when you are acquiring too many businesses too fast?
Jacques: I’ll tell you what we are not looking for. We don’t ever want to acquire these massive giants, because the integrations just kill any business. Instead we typically look for two things: we look to enter a market where we believe there is massive growth and where we don’t play in currently. In other words, we are not trying to protect the revenue line or take a competitor out. We are also staying with our current products by bolting on to add tremendous value and grow that way exponentially. The second thing is where we’ve got an existing product set or skills base, but we’re not managing to grow at the pace that we want to, we would acquire a business to give us more skills, access to certain resources, technologies, patents etc. So those are really the two things that we look for when an acquisition is discussed.
Cassim, you were also saying that as RMB you’ve been a bit more involved with this as a private equity investment. Is this the case because it’s a high-speed technology company that has to innovate very quickly, all the time?
Cassim: The intensity of this business and the scale of the journey that Vox has undertaken is significant. As a departure point Vox was taking market share away from the large players, which made them much more relevant and in order to do that, the Vox management team have been quite demanding on us. They would often say ‘we want to do this, we want to go in this direction.’ And we would reply:  ‘well take us along the journey’. If something succeeds then we both know that we’ve added to that success. The management team has their views, we know their skills, and we are there to ask the hard questions and to help them stimulate the thinking and add some cool-aid to the water.
Also Cassim, just taking a step back, it definitely looks to me as if RMB has a strong technology play in the South African market at the moment. Do you think that’s a fair thing to say?
Cassim: We’ve got two real technology plays in our portfolio – Vox and Tracker. Our business is agnostic really. We learn alongside the businesses we invest in. We learn with the management team, using the management team as our partners in the business about many industries, and so I wouldn’t say we’re experts. We’re definitely still learning and embracing some very skilled and talented management teams.
And perhaps just as the last question for both of you, what does the future hold now? What’s the next step in this journey that you guys have engaged in?
Jacques: From a practical perspective, the next step is the market is definitely consolidating. Vox over the last six years has grown to a point where we can now lead the consolidation and play an active role. Gone are the days when we had to be scared of the big five, we are part of that now. We’ve got the muscle behind us, we’ve learned lessons, we re-established our relevance and I think we’re going to play an active role in this consolidation.
Cassim: From a shareholder perspective, the business is executing on its business plan and the management team have positioned this business in a place where the drivers of the business all look positive. We’re growing significantly year-on-year, we’ve got a relatively un-geared balance sheet which means that we have the ability to opportunistically look for opportunities to consolidate the market or to come up with bigger and bolder ideas to take on the market. I think that’s quite an exciting place to be, particularly in the context of South Africa today. So I’m quite excited about Vox.
Thank you so much for taking the time to chat with me today.
Cassim and Jacques: Â Thanks
- RMB Ventures is a mid-market, South African private equity investor and, as a subsidiary of FirstRand Limited, an on-balance sheet provider of private equity capital. Its close association with Rand Merchant Bank provides access to the full suite of investment banking products.
