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Telkom’s Multi-Links disaster
| Gugulethu Mfuphi | May 26, 2011 | 3 comments |
Gugulethu Mfuphi
Gugulethu Mfuphi is Moneyweb's ICT journalist and is passionate about leveraging the power of the sector to enable delivery to the masses.
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How Telkom’s Nigeria investment, turned into a problem child.
What was meant to be Telkom’s springboard for further expansion in West Africa has proven to be the telecom providers’ biggest investment mistake.
Multi-Links, a Nigerian telecoms agency, has cost Telkom R5.1bn in impairment losses after investing $410m (R280bn) in it. The entity is facing a lawsuit and arbitration case, which is expected to lead to the further impairment of the subsidiary when its results are released next month.
Telkom’s effort to increase its presence across Africa via its Multi-Links investment has proven to be more of a liability than an asset.
Blue Label Telecoms is still preparing a claim to try to recover an unspecified amount of damages it says it has suffered after losing an exclusive contract with Multi-Links in November last year.
Head of Blue Label investor relations Michael Campbell said, “The arbitration process is currently underway, we are still working out the quantity of our claim with both teams in South Africa and in Nigeria.” No timeframe has been given as to when the case will be concluded as the company wants to ensure that an orderly process is followed.
At the same time, Telkom’s disappointment in its Nigerian asset has been compounded by the threat of the looming $251m (R1.8bn) lawsuit filed by private-equity group Helios Investment Partners and SA’s Shanduka Group. According to a report by Reuters on Monday, Helios Towers Nigeria, which builds and rents towers used by mobile operators, is suing Telkom in the High Court of Lagos State, claiming that the South African firm walked away from a ten-year rental agreement after just three years.
With all the telecoms growth opportunities that are available in Nigeria, some may wonder where and how such a promising venture proved to be fruitless.
Where did Multi-Links go wrong?
Some industry observers believe that poor market research, over eager investing and weak leadership might have led to the downward spiral of Multi-Links.
Frost and Sullivan ICT analyst, Vitalis Ozianyi believes that poor due diligence and market and technology research into the Nigerian market led to the company’s poor performance. “Telkom invested in a CDMA (Code Division Multiple Access) network, that doesn’t have much of a future in Africa,” said Ozianyi.
Joel Bloomer, head of research & partner at First Avenue Investment Management shares this opinion, adding that the investment in the Nigerian company was ill conceived as the GSM (Global System for Mobile communications) network has proven to be more popular and is more in demand on the continent.
“Telkom appears to have over invested in Mutli-Links in the hopes of capturing the high growth telecoms market in the country,” says Frost and Sullivan ICT analyst Protea Hirschell. Telkom acquired a 75% stake in Multi-Links for $280m in 2007 and two years later spent an additional $130m on the remaining 25%. Ozianyi compares Telkom’s over eager investment to throwing water into a bucket that is already leaking. “Telkom’s initial purchase of 75% was okay but the remaining 25% at nearly the same price was a big mistake for the entity. Telkom failed to research and understand the market dynamics in Nigeria,” says Ozianyi.
Increased competition has also made it more difficult for Telkom to compete in this field. There are already four well entrenched and about six other mobile operators in Nigeria.
While the Helios case still being heard in the Nigerian High Court, Bloomer believes that a worst case scenario would see Telkom losing the lawsuit, but that this would have minimal impact on the company’s bottom line. ”Currently the amount that Helios is claiming could reduce Telkom’s market share by +/- 9% should Telkom loses the case, but it’s likely that they could settle for slightly lower,” said Bloomer.
In April, Telkom had announced that it had signed an agreement to sell Multi-Links to Visafone, but it’s believed that this sale could be halted due to the court case. Multi-Links spokesperson Ijeoma Abazi, says there are no restrictions or injunctions on any of the parties, with regards to the potential cessation in the sale of Multi-Links.
With a court case pending and Telkom results expected to be released soon, it will be interesting to see/hear what lessons Telkom has learnt from its failed venture.
Telkom is struggling to diversify its revenue stream. Multi-Links was meant to be the start of this. It has failed horribly and shareholders will hope the operator has digested the costly lesson.
Source: Moneyweb
