An industry up for grabs
Telkom’s annual results presentation, which takes place in Midrand on Monday, could be the most lively in its short history as a listed company.
Analysts will be looking for insight into dramatic weekend developments which saw two potential suitors, the UK’s Vodafone and a consortium led by Tokyo Sexwale’s Mvelaphanda Group, making separate overtures to the partially state-owned operator.
The proposed deals, which have sent Telkom’s share price soaring, could result in the company disposing of its 50% stake in cellular operator Vodacom and, in turn, selling its fixed-line assets to the Mvela consortium.
The deals, if they transpire, would lead to a long-overdue divorce between Telkom and Vodacom, which have for years had a fractious relationship. And they would allow Telkom to take Vodacom head-on in mobile broadband.
The deals would unlock value trapped in Telkom’s fixed-line business — for a long time a source of frustration for investors — and set the stage for a black-empowered Vodacom, controlled by the UK’s Vodafone, to be listed on the JSE.
Telkom has received an informal offer from Vodafone to acquire 12,5% of its stake in Vodacom for US$2,5bn, provided it unbundles the rest of the stake to Telkom shareholders. This deal could be Vodafone CEO Arun Sarin’s swan song. Sarin, who has made expansion in emerging markets a priority, announced last week he would leave the company in July.
The renewed approach to Vodacom follows talks between MTN and India’s second largest cellular network operator, Reliance Communications.
MTN is said to be planning to buy 74% of Reliance in a cash and stock swap deal. The combined business, which would have more than 120m subscribers in markets across Africa, India and the Middle East, is seen as a threat to Vodafone, which last year acquired a controlling stake in India ’s fourth largest mobile operator, Hutchison Essar.
Then there’s the Mvela consortium bid, backed by the New York-listed Och-Ziff Capital Management Group and “other strategic funders”, which proposes to acquire Telkom’s entire issued share capital. Och-Ziff is an asset management firm with about $30bn of assets under management.
The Mvela consortium says the offer, which reportedly will value Telkom at R90bn, will only be made if the company’s board confirms that it will unbundle the company’s stake in Vodacom.
But with government tenaciously holding on to its 39% stake in Telkom, and with a further 15% held by the Public Investment Corporation, it’s not clear whether the Mvela consortium will be able to wrest full management control.
Sexwale’s senior role in the ANC and his close ties to controversial party president Jacob Zuma are sure to add spice to the talks.
Communications department director-general Lyndall Shope-Mafole could not be reached for comment, but has said previously that government is not willing to sell its stake in the company given Telkom’s strategic importance to SA.
Mvela’s precise intentions are not yet clear. Analysts wonder why it’s interested in Telkom’s fixed-line business, where growth opportunities are limited.
Also not clear is whether the consortium will leave Telkom CEO Reuben September and his team in place. September has come under fire from analysts and asset managers for the way he has managed the company.
Mvela’s interest follows the termination of earlier, separate talks between Telkom and MTN and Telkom and Dubai-based Oger Telecom. MTN walked away after it couldn’t reach agreement with Telkom. Oger, whose first offer was rejected by Telkom, may come back to the table as part of the proposed Mvela bid.
Oger holds an effective 75% stake in Cell C — 60% direct and 15% through Lanun Securities — and may be keen to exploit synergies between Telkom and the mobile operator, which has struggled to gain a toe-hold in a market dominated by MTN and Vodacom.
The interest from Mvela and Vodafone won’t be the only issue on investors’ minds at Telkom’s results presentation. They’ll also be looking for further detail on how the company is coping with escalating competition. Rival Neotel has signed up its first corporate customers and last month launched its first retail Internet and voice services at prices that undercut Telkom.
In March, Telkom promised to provide more detail about plans to invest in new fixed-wireless and mobile data networks. The company has already begun building a broadband network based on a promising wireless technology known as WiMax. If it were to sell its stake in Vodacom, it could offer mobile WiMax services, allowing it to compete more effectively with the high-speed 3G data services provided by the cellular operators.
But Vodacom and MTN, newly empowered by the Electronic Communications Act, are building high-speed fibre-optic networks, hoping to cash in on the lucrative market for fixed-line connectivity and related business services. Rivalry between Vodacom, MTN and Telkom is set to grow more intense as the mobile operators seek to diversify their revenue out of wireless voice services.
Telkom will need to be more nimble and improve its customer service if it hopes not to lose significant market share. Reports that the company plans to outsource vast chunks of its business, in an effort to address poor service levels and deal with an acute shortage of skills seems to suggest that management understands the scale of the threat.
According to a report in the Mail & Guardian, Telkom will invite bids from local and international companies interested in running various parts of its business, including core network operations and information services.
Meanwhile, staff at start-up pay-TV operator Telkom Media will be hoping Telkom has good news about a new shareholder. Telkom surprised the market in March when it said it would substantially reduce its investment in what had been seen as the most serious of four new companies licensed to compete with Naspers-controlled operator MultiChoice.
Analysts welcomed Telkom’s decision to pull out — launching a pay-TV service is expensive — but the move has thrown Telkom Media’s future into grave doubt.
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