Telkom: back to square one
The collapse of talks between MTN and Telkom means the uncomfortable relationship between the SA fixed-line operator and its 50%-held associate, cellular operator Vodacom, is set to continue. But how long can it last, especially as Vodacom begins to compete aggressively with its shareholder in the provision of high-speed fixed lines?
In announcing the failure of the talks with MTN, Telkom also said its plans to sell part or all of its stake in Vodacom to the cellular operator’s other shareholder, the UK’s Vodafone, had been terminated. It said the MTN and Vodafone talks were inextricably linked — a surprise, because analysts had thought the deals were not contingent on each other.
The failure of the talks has put a radical restructuring of SA’s telecommunications industry on ice. It has also sent Telkom’s share price plunging. MTN, on the other hand, has risen sharply — up more than 15% — to a record high as investors express relief that the cellular operator will not be weighed down by a lumbering fixed-line operator.
Analysts say Telkom and Vodafone need to resolve which of the two has control of Vodacom. At the very least, they say, management at the three companies need to sit down and find a way for Telkom and Vodacom to work more closely together.
Détente is not expected soon. Vodafone CEO Arun Sarin has not given up trying to take control of Vodacom. This is a problem for Telkom, which clearly covets a mobile partner with which it can develop converged products. As competition intensifies, Telkom needs a mobile partner to help it fend off rivals by offering integrated telecom solutions.
Vodacom Group CEO Alan Knott-Craig must also be disappointed. Telkom’s shareholding in Vodacom has meant the company hasn’t been able to compete as aggressively in SA as it would have liked. And Vodafone’s shareholding has prevented Vodacom from expanding to countries where MTN has succeeded.
So, back to the status quo: Vodacom competing aggressively with its shareholder, Telkom fighting hard to maintain margins in its fixed-line business while reinventing itself for an era where voice will offer little to the bottom line.
Tough times lie ahead for Telkom. Already, its investments in infrastructure and improved customer service, coupled with price cuts forced on it by new competitors, have depressed margins.
In the six months to September 30 2007, Telkom reported a 15,1% decrease in headline earnings per share, in spite of another robust performance by Vodacom. Net profit in the fixed-line business fell 47% and operating profit was down 19%.
Telkom is being squeezed from all sides:
* The liberalisation of the voice market has seen a handful of new competitors offering cut-price voice services, forcing Telkom to slash national long-distance and international call rates. Local call prices remain high, but are also likely to come under pressure.
* Telkom’s monopoly of submarine cables has come to an end. Last month, second network operator Neotel finally secured access to Sat-3, the cable system that links SA with Europe. And a new cable system, being built by Seacom and supported by Neotel, is set to come on stream in 2009.
* Companies such as MWeb, Dimension Data SA and Verizon Business will soon have licences to build their own infrastructure independently of Telkom. Though not all will do so, they will now have the upper hand in price negotiations with Telkom.
* The cellular operators are gearing up to deploy thousands of kilometres of fibre-optic cables, for their own band-width needs and to provide high-speed access to corporate customers in direct competition with Telkom and Neotel.
* Regulatory interventions will also affect margins. For example, local-loop unbundling, expected in the next few years, will allow rival operators to provide services over the “last mile” of copper cables that connect consumers to Telkom’s telephone exchanges.
To counteract these pressures, Telkom must reinvent itself. It is making the right noises, analysts say. It must accelerate its broadband roll-out and expand into content delivery and other value-added services.
CEO Reuben September (pictured) says the aim is to have between 15% and 20% of fixed-line subscribers on broadband digital subscriber lines by 2011 (from 8,5% now). It also wants to increase the speed of digital subscriber line access so it can deliver video, music and other value-added media content. But analysts say that what Telkom needs to achieve above all else is to fix its mobile strategy. Industry talk is that Telkom could make a bid for Cell C, SA’s smallest cellular network operator. Another possibility is that a company other than MTN will make a bid for Telkom. The Financial Times reported last week that Cell C’s parent, Oger Telecom, had expressed an interest in acquiring Telkom.
Irnest Kaplan of Kaplan Equity Analysts says the best way forward for Telkom is for it to remove the obstacles preventing it from forging a closer working relationship with Vodacom. “You almost want to slap them on their wrists and tell them to wake up,” Kaplan says of the fact that the two companies have not developed converged products aimed at reinforcing their market-leading positions.
It’s hard to know if the problem is in the shareholding structure, in Vodacom management, or at Vodafone, Kaplan says. “But the fact remains that Telkom has the best asset, the best people, and the best brand in Vodacom. It needs to start getting creative. Why don’t the major decision-makers in each of the three companies sit around a table and figure out how they can work together?”
Loading ...