How Makate wrung more than R348m out of Vodacom

Vodacom’s hopes of keeping secret its “settlement” with Nkosana Kenneth Makate, the man behind the mobile operator’s “Please Call Me” service, are destined to fail, say experts. 

This week, the mobile company said its 17-year legal tussle with Makate was over after it reached a “confidential settlement”. The secrecy over this deal infuriated Makate’s supporters, which have billed this as a David versus Goliath battle against a corporate behemoth, with the settlement being a key indicator of who prevailed. 

But with Vodacom due to report its half-year financial statements next week, the operator was forced to reveal the hit to its profit from this legal case – which works out at between R348m and R658m. This might be marginally understated, however, since Vodacom had already set aside a provision in its accounts for this – which it described as “immaterial” – which will now be released.

Experts say the final tally is likely about R500m – a far cry from both the R20.2bn Makate had initially wanted, as well as the R47m he was offered in 2019 by Vodacom’s CEO Shameel Joosub, which he deemed “insulting”.

The legal imbroglio dates back to 2008, when Makate demanded Vodacom should compensate him for his idea in 2000, as a trainee accountant, that people who had run out of airtime could send an SMS saying “Please Call Me” to the person they wanted to speak to. Vodacom itself described this as a “brilliant idea”, which brought in billions for the company. 

But the legal ping-pong meant that neither side scored a decisive victory over many years. In the last to and fro, the Constitutional Court referred the case back to the Supreme Court of Appeal, dubbing this a “regrettably unending” dispute.

After the settlement this week, Makate said the details were “subject to confidentiality”, but he said the battle, which began when he was 24 years old, “has taken more than half of my life”.

Insiders at Vodacom say there is a watertight non-disclosure agreement that prevents them saying more than what was contained in the banal and obvious statement that “both parties are glad that finality has been reached”. 

But Vodacom will release its half-year results next week, and Joosub will likely be pressed on the final quantum.

Ryan Fisher, a well-known lawyer who consults to the corporate sector, says it is inevitable that the settlement sum will emerge soon in the public domain. 

“Vodacom would have insisted on a strict confidentiality requirement, but as a public company, this will never stay quiet for long. At some point, I expect one of the parties will make this settlement an order of court because they don’t trust each other, at which point it’ll come out,” he says.

Fisher says that while it was clear Makate was never going to get billions, Vodacom should have settled this case years ago. “Somebody’s head should roll at Vodacom for dragging this out for 20 years,” he says.

Spotlight on litigation funding

Another contentious aspect of this matter is that Makate’s case was backed by companies that provided litigation financing, so it’s unclear how much of the final settlement he will actually keep. 

Here, funders like the Sterling Rand Litigation Fund would back someone like Makate in exchange for a portion of the ultimate award, often between 25% and 50%. Fisher says this trend is exploding in South Africa. 

“Access to justice through the courts is completely unaffordable, even though the constitution guarantees this. It is the most severe inequality issue in the country, after medicine. So anything that mitigates this has to be good.”

But it’s not so black and white, says Bernard Hotz, a senior director and head of business crime and investigations at law firm Werksmans, who warns of the dangers of litigation funding. 

“People who fund these cases don’t always know all the facts of a case when they agree to do that, so there could be nasty surprises. And the danger for the individual is that they can also get exploited,” he says. 

In this case, Hotz says, the majority of the award may end up going to the litigation funders, even though Makate himself would have carried the emotional scars of a two-decade legal battle.

For Vodacom, the amount paid will ultimately be small beer – less than 8% of its half-year profit – but the settlement gets rid of a potentially nasty contingent liability, given how unpredictable the courts have been.

Richard Cheesman, an analyst at Urquhart Partners, says this is a pretty decent outcome for Vodacom. 

“The market never thought that Vodacom would pay billions, but the fact that there is finality has probably been supportive of the share price today. It’s also not a bad outcome for Makate, though it’s unclear what he will be left with after all expenses are settled,” he says.

Vodacom, like most cellular operators, has battled over the past decade with sluggish profit growth. This year is the first time in ages that it has shown any real growth – which makes this a good deal to get rid of this headache.

“Financially, Vodacom seems to be on the front foot, so if you’re going to take a hit to your profit – even if it’s small – now is a good time to do it,” says Cheesman.

Ultimately, he says the mobile operators have been in the doldrums, with voice revenue dropping, and new competition emerging from the likes of Starlink. Cheesman says the industry has struggled with the perception that its offering is simply a “dumb pipe” in a world where the investment enthusiasm is around AI and fintech.

“MTN has been in more of a litigation tangle than Vodacom ever was, with the court challenge from Turkcell, and lingering calls for sanctions in the US over its operations in Afghanistan and Iran. So while MTN is doing well operationally, those risks are still hanging over it,” he says.

This lack of excitement about the prospects for mobile firms is reflected in the sobering expectations of most analysts. The seven analysts who cover Vodacom expect its stock to rise just 4.2% from its current level to R143.14.

Equally, MTN’s expected target price is R183.25 – just 9.8% above its current level, which may not be enough to compensate investors for the mounting legal risks.

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