Telkom bets big, but will it be enough?
Telkom is finally being forced to compete.
Interim results to September 30 out on Monday show a “naked” company, which for years has produced glossy financials thanks to its 50% share of Vodacom.
“Naked” is an apt description, offered by Delta Partners principal Tammy Whyman, in describing the now (somewhat more) “exposed” operator.
Whyman believes Telkom is being “too secretive about its strategy” to replace revenues.
She, along with many other analysts, had hoped Telkom would detail its strategy with the release of these numbers.
The group is under increasing competitive pressure in South Africa, it’s facing higher costs, the Nigerian business Multi-Links is still bleeding money, its other African acquisitions (Africa Online and MWEB Africa) currently lack the scale to compete, and its nascent mobile business only has 9 000 subscribers.
But the company admits it has to pull a few rabbits out of a hat to grow. It has a fairly large pile of cash – around R3.1bn – thanks to the Vodacom sale, and has access to billions of rands in debt.
It has reorganised into three business units: South Africa, international and data centre operations.
The international business remains dragged down due to Multi-Links’s poor performance, and one wonders how long Telkom will persevere in Nigeria.
Telkom states plainly that Multi-Links’s balance sheet is over-geared and unable to raise debt and creditor financing. It is recapitalising the business with preference share capital to enable the company to repay existing debt.
Whyman believes that there will be consolidation in the CDMA market in the west African country, and “would not rule out the possibility that they would be up for sale”.
Telkom now admits this is an option, a far cry from the “we’ll-get-it-right-at-all-costs-attitude” in previous years: “We continue to review all options with regard to consolidation and/or any other opportunities in Nigeria to accelerate the turnaround of Multi-Links.”
But it is the South African business and data centre operations unit which hold the most promise. Telkom has identified opportunities and is willing to invest heavily to make a go of it.
The first, data centre operations, essentially involves Telkom carving out a portion of its business. It has this capacity already, and as of last week, these employees work for a new divisional boss, with a new identity: Cybernest.
At the launch of its newest data centre in Bellville last week, group CEO Reuben September was resolute in his keynote address.
“We are deadly serious about our data centre operations.” He explained that he does not use the word “deadly” often.
“This is not about ‘let’s see how it goes’,” continued September.
It had tried to buy this type of capacity in 2006, during its subsequently aborted bid for Business Connexion (JSE:BCX).
This is not a small bet by the company. The new data centre, located on top of its existing building in Bellville, came with a price tag of around R350m.
And it’s a truly world-class facility. Touring the facility even makes you forget you’re in Bellville. You’d be hard pressed to find any operation that even comes close in the local market.
Vodacom Business also spent hundreds of millions on its (still vastly underutilised) data centre in Midrand. The market is hotting up. Neotel has also built a data centre in Midrand, BCX has expanded its centre, Internet Solutions is continuously expanding, and Verizon (now a unit of MTN) is growing. Many of these operators are building data centres in Cape Town.
But September is deliberate and determined and “will be a formidable competitor”. It’s not just about a data centre in Bellville. This is somewhat of a hidden secret within Telkom. The group has six facilities around the country, and measured by square-metres, is the largest data centre provider in sub-Saharan Africa.
“This is not a cold launch, this is a hot launch,” he joked. The unit already has 80 customers, without even officially launching. It manages R2.5bn worth of IT assets, including 4 000 servers.
Telkom sees its business-services relationship with corporates as a key competitive advantage.
Clients who already use products like Telkom’s VPN (virtual private network) offering have demanded these services from Telkom, explains acting MD of Cybernest, Pierre Marais.
The trick is not only to compete in this market, but also to leverage what it’s learnt here into the rest of Africa. Vodacom Business is trying this strategy too, but market feedback suggests it doesn’t yet have the track-record or a complete suite of skills required. Telkom argues that it has what it takes, especially from a skills perspective.
Its second big bet is on mobile. It’s building out a network in South Africa and currently only offers a 3G service to consumers.
The intention is to offer a fixed-mobile hybrid service. Your “home” phone line will also be a cellphone.
Many had hoped that Telkom would detail its mobile strategy in these results, but it says “information regarding our network build and go to market strategy cannot be disclosed due to competitive sensitivities”.
This is not a small investment by the company, with the capex associated with the mobile network estimated to be a maximum of R6bn over five years”.
But R6bn will not build a mobile network; you’d hardly be able to blanket Gauteng with that money. Rather, Telkom says it is looking at operating lease-type arrangements, as well as co-location and sharing to reduce its capital investment.
It will also enter into a roaming agreement with one of the major mobile operators, much like the arrangement between Cell C and Vodacom. Unconfirmed market talk suggests that this agreement is being concluded with Vodacom.
Whether consumers will bite at its mobile offering remains to be seen. Telkom does, however, have the advantage of being late to market, meaning it can leapfrog its other mobile competitors.
Telkom, under September, has made its two bets. One hopes they don’t turn out quite like Multi-Links has.
But there’s still time to fix that. With its data centre business and mobile ambitions, there won’t be.
Time – and that cash pile – are running out.
Telkom & competition – discussion
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