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There's a trading war between two telecoms giants Here's how to profit from it…

by , 15 July 2015

Telkom has had a number of advantages over its rivals, including its monopoly legacy and infrastructure which locked South Africans into contracts and its expertise in building fixed-line networks.

Subsequently, Telkom has kept a firm control on fixed-line services in South Africa.

But one recent announcement is about to change all this.

It's about to start a very interesting "war" in the South African telecoms sector, pitting Telkom against the mobile giant, Vodacom.

So keep reading below to find out what's going on and how you can play this telecoms battle…

Telkom's downfall began when mobile communication was born

When Telkom started operating, it gave South African's the opportunity to connect to their family and friends through fixed-line communication.

But that has changed over the past 15 years.

Mobile giants such as Vodacom, Cell C and MTN stepped up their game to compete with Telkom in the new era of wireless communication, leaving Telkom, with its clunky landline infrastructure playing catch up.

Telkom lost its supremacy over voice communication as its cellular rivals challenged it and won.

Today, the majority of South Africans communicate with their mobile devices using MTN and Vodacom services.

Not to mention, Telkom's control over international bandwidth has ended thanks to underwater cables with names like Seacom and Wacs. These cables have substantially brought down wholesale bandwidth prices.

And, South Africa has seen the likes of Neotel offering fixed-line communications to compete with Telkom's core business at competitive prices.

One announcement is set to heat up competition in the telecoms sector

In June, the Competition Commission gave Vodacom the go-ahead to buy fixed-line telecoms business, Neotel, for R7 billion.

The deal will boost Vodacom’s offerings and help it enter the fixed-line market -  and take on Telkom's core business.
Telkom has tough competition on its hands.

In 2014, Vodacom CEO Shameel Joosub revealed it plans to deploy fibre to 150,000 homes and 100,000 businesses within the next three years.

Not to mention, Vodacom's experience in the telecoms field will help it gain a strong foothold in the fixed-line market.

Vodacom is already South Africa's biggest mobile network with around 30 million subscribers.

How you can play this telecoms war

This year hasn’t been the best for Telkom.

Aside from competition pressure from Vodacom, it's been troubled with staff unrest, the threat of large-scale retrenchments and severe financial pressures. It now plans to strip out at least R1 billon a year in costs to help alleviate the problems.

These problems could take months, even years to fix.

So it's no surprise Telkom’s share price took a hit this year.

If you invested in Telkom from the beginning of 2015, you’d be 20% down.

On the other hand, if you invested in Vodacom, you'd be 5% up in the same period. It’s not much, but it still means profits.

So what must you do?

Vodacom share price slipped to around R136 from its high of around R148 in May. This means anymore dips and Vodacom could become a solid buy!

We currently have Vodacom in both the South African Investor and Stock of the Month portfolios.  And we intend to keep this stock.

The Neotel deal should boost Vodacom's operation which investors will take a liking to. So Keep an eye on Vodacom and if the price is right – buy it! There's still a lot more growth to come from the mobile giant.

There's a trading war between two telecoms giants Here's how to profit from it…
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