NEXUS TO WITHDRAW OBSTACLES TO SNO

UNCLAS SECTION 01 OF 02 PRETORIA 005041

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SENSITIVE

E.O. 12958: N/A
TAGS: ECPS ETRD ECON EINT SF
SUBJECT: NEXUS TO WITHDRAW OBSTACLES TO SNO

REFTEL: PRETORIA 3943

(U) Sensitive but unclassified. Not for Internet
distribution. Please protect accordingly.


1. (SBU) SUMMARY. A telecommunications consultant to Nexus
Connexion, the empowerment shareholder in South Africa's
second national/network operator (SNO),said that Nexus
would remove its legal challenges to the SNO by the end of
2004 and have a license to operate by February 2005. Nexus
is withdrawing its litigation for the following reasons:
First, an agreement with the Minister of Communications
provides Nexus and its lawyers with three weeks' notice
prior to her implementing the SNO license; Second, Nexus is
satisfied that bids by qualified investors for the SNO's
remaining unallocated equity will prevent Two Consortium and
CommuniTel from controlling the SNO; and Third, an SNO
shareholder agreement prevents Two Consortium or CommuniTel
from putting in place lucrative contracts for themselves.
END SUMMARY.


2. (SBU) A telecommunications consultant to Nexus
Connexion, the empowerment shareholder in South Africa's
second national/network operator (SNO),told Econoff that
Nexus has withdrawn one court interdict standing in the way
of licensing the SNO and would soon set aside the other.
This would pave the way for a shareholding agreement between
the SNO partners, which is required before the Independent
Communications Authority of South Africa (ICASA) can issue a
license. The consultant said Nexus anticipates finalizing a
shareholding agreement before the end of the year and
expects to have a license before February 2005 when the
telecommunications industry will be liberalized.


3. (SBU) This contrasts sharply with Nexus' response
following a September pronouncement by the Minister of
Communications approving a license for the SNO. At that
time, Nexus said it would not drop its first interdict
calling for a judicial review of the Minister's decision to
grant 25 percent of the SNO to CommuniTel and Two
Consortium, despite a recommendation from the regulator to
the contrary. Nexus had also filed a second interdict to
prevent the Minister from implementing her decision to
license the SNO.

--------------
NEXUS INTERDICT 2
--------------


4. (SBU) In late October 2004, Minister of Communications
Ivy Matsepe-Casaburri agreed to provide Nexus and its
lawyers with three weeks' notice, should she decide to go
ahead with implementing the SNO license. According to the
Nexus consultant, Nexus subsequently withdrew its interdict
on this issue, secure in the knowledge that three weeks
would be sufficient to refile the interdict should they
wish.

--------------
NEXUS INTERDICT 1
--------------


5. (U) Nexus' first legal challenge was more complex. In
December 2003, the Minister awarded a 26 percent share in
the SNO to Two Consortium and CommuniTel, just months after
ICASA had determined that neither was qualified for the
equity stake. Shortly thereafter, Nexus filed an interdict
calling for a judicial review of the Minister's decision.


6. (SBU) In an effort to break the SNO deadlock, Casaburri
announced on August 27, 2004, that she was reducing the
combined holdings of CommuniTel and Two Consortium from 26
percent to 25 percent in the SNO's 51 percent equity stake
(SepCo). The remaining SepCo shares would be reserved for a
yet-to-be-named financial investor. The consultant said
that Nexus was unsatisfied with this arrangement because it
left CommuniTel and Two Consortium in a position to control
SepCo, and ultimately the SNO, until an investor was found.


7. (SBU) The consultant said that Nexus' concerns were
resolved when the Minister revealed on October 20 that Old
Mutual Asset Managers and TATA Africa Holding (Pty) Ltd.
had submitted Expressions of Interest for the 26 percent
unallocated equity of the SNO. The imminent allocation of
the remaining SepCo shares means that neither Two Consortium
nor CommuniTel would be able to control the SNO, which has
been Nexus' concern all along.


8. (SBU) The consultant said that while Nexus favors TATA
Africa Holding, it would not object to either of the equity
bidders. He said Nexus was satisfied that both bidders
bring the desired experience and capital to the SNO. Among
other things, the bidders were required to have net assets
of at least R5 billion, experience in telecommunications,
the ability to arrange funding of more than R5 billion, and
a willingness to hold its shares for at least five years.


9. (SBU) Finally, the consultant said that Nexus' concerns
were further alleviated in an agreement with the other SNO
shareholders to limit shareholder seats on the Board of
Directors to 49 percent, prohibit any shareholder from
providing a management contract to the SNO, and require
unanimous approval among the SNO shareholders on all supply
contracts. These last two provisions effectively put in
place obstacles to any future attempt by shareholders to
obtain lucrative contracts for themselves.

FRAZER