SA's IT services sector is likely to undergo further consolidation in the next 12 months as international players enter the market and as the convergence between telecommunications and IT gathers pace. That's the view of Dimension Data SA CEO Allan Cawood, who says the deregulation of telecoms in SA is top of mind for everyone in the sector.

The Independent Communications Authority of SA (Icasa) is expected to grant licences to some of the bigger players in the sector soon. That will allow them to become fully fledged telecom operators, able to build their own infrastructure. Didata division Internet Solutions (IS) is hoping its value-added network service licence will be converted by Icasa soon to allow it to do this.

Cawood says convergence between IT services players and telecom companies is inevitable and he wouldn't be surprised if one or more large global telecom groups buys up local IT assets soon. At the time of writing, GijimaAst was trading under cautionary and rumoured to be in talks with BT Group (formerly British Telecom) about a potential deal. It was rumoured at one stage that BT was considering an acquisition of Didata, though BT denied it. Cawood says Didata has received a number of unsolicited offers for IS, but the group has no plans to sell the unit, which it regards as critical to its expansion - IS has recently expanded into Nigeria and Kenya.

One deal that will happen soon - it hadn't happened at the time of writing - is the privatisation of state-owned Arivia.kom, which boasts Transnet as a key client. Two companies, Didata SA and T-Systems SA, have been shortlisted to buy the company. It's not clear how much Arivia will fetch.

SA's two leading IT companies, Datatec (number one by net profit in this year's Top Companies) and Didata (a close number two), have both become substantial international players with businesses in countries across North America, Europe, Africa and Asia. Both are listed in London - Didata has its primary listing there and Datatec a secondary listing - and both have annualised revenues of more than US$4bn. Both got into trouble in the early 2000s after the dot-com bubble burst and IT spending dried up but both are now growing strongly.

Though Didata's share price is still far from the R70-plus peak it reached in late 2000, it is well above the low of below R2/share it reached in 2003, when the market was pricing in potential bankruptcy. Datatec's share price has performed better, but it also fell further from the peak than Didata. An investment in Datatec in April 2003, when the share bottomed, would have generated a return over five years of more than 700%. Datatec is still trading a relatively uncommanding p:e multiple of nine (mid-May); Didata looks more expensive at 18, though the pace of its earnings growth is quicker.

In the year to February 2008, Datatec recorded an operating profit of $124m, up 25% from $99m in the 2007 financial year. Revenues rose 27% to $4bn, from $3,2bn previously.

As the US economy slows, consulting company Frost & Sullivan says Datatec will benefit from its exposure to developing markets. The group still has a heavy reliance on its US operations, with 42% of revenues in the year to February coming from that country, Frost & Sullivan says. The company recently made an acquisition in Latin America, of a firm called Promo Technoliga.

Frost & Sullivan analyst Spiwe Chireka says Datatec's Africa business will also continue to grow. "The acquisition of Africa Sparnoon has given Datatec access to eight additional markets on the continent, including the highly lucrative markets in Ghana and Nigeria," she says. "Datatec is well positioned to take advantage of the higher than global average growth in the vastly untapped African IT market."

The consulting firm says Didata will benefit similarly from its strong presence in emerging economies, especially Africa, where growth is expected to outstrip the developed world.

"African IT spending will probably not be affected by the slowdown happening globally because the continent is in a catch-up phase and thus growth is likely to remain high," says Chireka.

Didata increased is revenues by 23% in the six months to March 31 2008 and increased its gross margin by 0,5 percentage points. Earnings per share rose 42% and the group had a cash balance of nearly $400m. Growth was strong in all regions, including the US.

Didata CEO Brett Dawson says the group is benefiting from good demand from telecom service providers - Didata is a key global reseller for networking giant Cisco - in Africa, Europe and Asia. Public-sector business is also growing strongly. In financial services, another key industry segment for Didata, the picture is mixed. "We have continued to see terrific growth in our top financial services clients but there are one or two companies where budgets are being tightened," Dawson says.

Datatec's Jen Montanana is also positive about the outlook, despite the turmoil in the US economy. "The current [financial] year has started well and is in line with our expectations," he says.