Take a hike
INVESTORS IN TELKOM want its bosses to unlock value fast – or else the board must be reconstituted with heavyweights that can act decisively. The market has been waiting roughly a year for the outcome of a mobile strategy that it had expected would culminate in Telkom selling its Vodacom stake.
But Telkom has again failed to grasp the opportunity to present a clear-cut strategy, wiping 10% off its share price in the course of a morning after it laid out its plans and prospects to analysts.
It’s not the first time a Telkom “analysts’ day” has resulted in such significant value being destroyed in a matter of hours. The same happened in April 2006, under previous CEO Papi Molotsane’s reign, when the group surprised the market with revised capital expenditure and earnings before interest, tax, depreciation and amortisation (EBITDA) margin predictions but couldn’t then elaborate on those because it was in a closed period. The share tanked.
It’s also not the first time that the market is dissatisfied with the composition of Telkom’s management team – although few analysts and fund managers want to be quoted directly on that point for fear of burning bridges.
Molotsane stepped down after 18 months at the helm as questions were asked about his suitability for the job (although no official reason was given for his resignation). Analysts were prepared initially to give Molotsane the benefit of the doubt but now say that, with hindsight, he was clearly out of his depth.
And although current CEO Reuben September is highly regarded as someone who understands the business inside out, many still feel he’s perhaps unsuitable for the position. Instead, an international appointment should have been made, or at least someone with more managerial clout. Government, in terms of its 38,9% shareholding, has the right to appoint five directors.
Earlier this year, Public Investment Corporation (PIC) CEO Brian Molefe was appointed its representative in place of Tshepo Mahloele. That seemed significant, given the niche he’s carving for himself as a shareholder activist. In addition to Government’s stake, the PIC owns another 15,3% of Telkom. However, Molefe was replaced after just more than a month with another PIC representative, Athol Rhoda. Was he too vocal? Or was there some other (less sinister) reason?
Many analysts feel that more appointments of the ilk of Massmart non-executive chairman Mark Lamberti should be made. But they wonder how much influence even someone as highly respected as Lamberti could have on a board such as Telkom.
At least one institution has been aggressively engaging Telkom’s management behind the scenes about issues of strategy, while others have expressed their unhappiness with regard to the perceived lack of direction, some more aggressively than others.
Stanlib analyst Zwelakhe Mnguni says it sent a letter to management in March and held meetings, at which it made its views known. Mnguni says Telkom needs to stop presenting new plans to the board and act upon them. Stanlib owns 4,7% of Telkom (on behalf of clients).
Among the issues Stanlib wanted to address with Telkom were why its mobile strategy review had taken so long, why Telkom needed to own a media company, concerns about declining service levels and whether Telkom had the managerial capacity to successfully expand up Africa while the SA market was experiencing rising competition. Telkom is now in the process of addressing some of those.
However, Mnguni says there’s no strategic rationale for Telkom to hold on to its 50% stake in Vodacom, given that it’s impossible to realise any meaningful synergies between the two without being seen as anti-competitive to SA’s other operators.
Renaissance fund manager Khulekani Dlamini says it’s time Telkom shareholders banded together to “ask for more”. He reckons SA investors are generally too lackadaisical with management. “We let them get away with being indecisive, with not setting targets.”
Renaissance would like a number of things changed. First, it wants a clear sense from Telkom management of what its Vodacom stake is worth so that if it rejects other opportunities, the market can evaluate those against Vodacom’s value.
Second, Dlamini wants to know who else has expressed an interest in Telkom; whether that’s reached the cautionary stage or not, so that investors have a say before management unilaterally turns things down (referring to Saudi Oger’s expression of interest).
Dlamini also says Renaissance wanted more detail on the end game regarding Telkom’s Africa strategy. “You can’t be half pregnant.” Although that could have good, long-term potential, he didn’t want Telkom to detract from the task of managing its SA operations by seconding much-needed skills elsewhere in Africa.
It also wants a timeframe for its mobile strategy review rather than it being a “gaping hole that becomes an excuse for not acting,” says Dlamini. In terms of its shareholders agreement with Vodafone, Telkom can’t play in the mobile voice sector in competition with Vodacom in southern Africa.
September emphasised that Telkom would honour that agreement but had taken the decision to build a wireless network for fixed voice and data, as well as for mobile data. It would use its recently awarded mobile spectrum to do that but wouldn’t necessarily use GSM technology – considered the global standard for mobile. It could also consider using CDMA (which is what Neotel uses). Key to that is that the network wouldn’t be able to conduct a cell-to-cell handover – in other words, it couldn’t carry mobile voice traffic.
However, should Telkom sell its Vodacom stake it would seemingly be able to use that network as a base to build its own mobile capacity, in addition to leasing capacity from any of the cellphone operators in a model similar to what Richard Branson has adopted for his mobile businesses worldwide – by leasing spare capacity from existing cellphone operators (called a mobile virtual network operator, or MVNO model). September says an MVNO was one possibility.
Mnguni says that the anti-competition clause in the shareholders’ agreement with Vodafone means Telkom can’t provide a mobile voice capacity. “That’s destroying the attractiveness and ability to retain its customers in the fixed line business.”
Cadiz African Harvest analyst Rajay Ambekar is also disappointed that, a year down the line, Telkom still hasn’t decided whether to sell its Vodacom stake. Ambekar says Telkom has always maintained it won’t sell Vodacom without an alternative mobile partner.
Ambekar says it’s not surprising in light of that – plus the fact it had decided to build its own wireless network – it doesn’t want to sell its Vodacom stake just yet. In so doing it would be left without a mobile partner.
But Ambekar hoped Telkom could still do so down the line and enter into some sort of partnership. Although it could possibly get more money for Vodacom now than in a few years’ time, Ambekar says selling it immediately would mean having a more aggressive competitor than keeping it in the stable while getting its own mobile network in place. “So maybe it’s a bit of a trade-off.”
September says Telkom is weighing up all potential options against the potential returns and capital outlay required and is probably “midstream” through the process of deciding on the best course of action regarding its mobile strategy.
However, Mnguni says the only value Vodacom offers Telkom is as a payer of dividends. And its value is likely to decline over time as the market matures and Vodacom’s growth prospects diminish. “We’ve made it clear we want it sold. The SA voice market is mature (it currently accounts for around 95% of Vodacom’s profits) and they need to crystallise that value in Vodacom. Otherwise, Vodafone could turn around and offer to pay significantly less for the asset. We’re disappointed at the announcement made on Monday (31 March).”
Asked at the analysts’ presentation whether there was more to the relationship with Vodacom, September conceded: “There are certain areas of synergy – but those are limited.”
Old Mutual Investment Group SA (Omigsa) equity research head Steve Minnaar says it was the first time Telkom had actually admitted Vodacom was just an investment – and that made the decision on whether to sell it more clear-cut. “So it doesn’t wipe out the potential for a Vodacom deal.” It also suggests a back-to-back deal – as it has hoped to do with MTN and Vodafone – isn’t necessarily essential, says Minnaar.
Although some others were of the opinion that the wireless network Telkom now plans to build represented the start of its move into mobile in SA, Minnaar says: “I don’t get the sense that it will launch mobile voice on a large scale as to be seen to be competing head on with the incumbent mobile operators.”
Minnaar says he is of the impression it is really just about how Telkom delivered services over the last mile (or local loop; the last leg of the network into homes and offices). While it had always been copper, it could now also be wireless. “Telkom’s saying we’ll provide you with broadband – it doesn’t matter how we do it… To me it’s an operational decision, not a strategic one.”
The differing interpretations again illustrate the lack of clarity from Telkom’s management. Not only did its board not make a decision about Vodacom but also declined a prospective offer from Saudi Oger for its fixed line business.
At Telkom’s current price, the market is essentially valuing its fixed line operations at zero. Vodacom is estimated to be worth between R140bn and R150bn – and hence Telkom’s portion is around R70bn to R75bn, although some believe it could be less. Yet Telkom’s total market cap, including its fixed line operations, is less than R70bn. That shows how the market sees Telkom as a value trap.
Although unconfirmed, the Oger offer was rumoured to be around R60bn for Telkom’s fixed line business, suggesting massive value could have been unlocked. But Telkom said it wasn’t in its shareholders’ best interests. It was an issue of value.
Citigroup telecoms analyst Rhys Summerton says Telkom’s board needs to be held accountable for the fact it chose not to put the Saudi Oger expression of interest to shareholders but decided of its own accord to reject it. “Shareholders may have had a different view to that of the board… The question is whether it’s acting in the best interests of all shareholders. At the very least, shareholders should have been advised of the offer.”
Minnaar was also not pleased that management hadn’t presented more detail to shareholders. “We needed more colour on this. Unless it was an obvious no-no – in which case, tell us it was a ridiculous number. Otherwise, how do we know?”
Another analyst says the only way the analyst community had found out about the Oger offer was while meeting that company in Turkey. Telkom had then been forced to disclose news of Oger’s advances. He questioned whether Telkom would have informed the market about Oger’s interest at all had it not been forced to – and then “petulantly” told the analyst community that it wouldn’t consider the offer after the fact.
Summerton says the Telkom board has always had a problem of being short on tele-coms experience and that remains the case. “The board needs to include people with international telco experience.”
Asked whether September was the right person to head Telkom, Summerton says it’s difficult to say. But although it may have been desirable to get an international candidate on board, it had to be looked at in context and be realistic about who’d want to head a fixed line business going through liberalisation in an increasingly competitive market environment. Summerton says September does have extensive expertise within Telkom. “It’s probably more the board that needs a closer look.”
Dlamini says at least management should give investors some idea of the hurdles that seemed to face Telkom at board level. “There’s clearly not a meeting of minds. We don’t even know if the board’s supportive. We just need a sense of what’s slowing it down.”
Summerton says it was noticeable that every time Telkom held an “analysts’ day” its share price fell – often significantly. In the case of its most recent presentations, that wasn’t necessarily due to bad news. In fact, Summerton says there was actually more positive than negative news, such as the potential for multi-links in Nigeria and the sale of the Telkom Media stake (the market was never keen on Telkom investing in content).
However, it seems the board tended to miss the mark in terms of its message to shareholders. “Management keeps getting the wrong end of the stick and doesn’t come out with a clear statement on its direction,” says Summerton.
Minnaar says Telkom shot itself in both feet at its most recent presentation “by coming up with a strategy but not being able to come up with the impact”.
At the value destructive analyst session in 2006, Telkom had been in a closed period and hence unable to elaborate on the reasoning behind its revised capital expenditure and margin targets (it put those out on Sens before the meeting started). But this time around it had “no excuse” not to touch on its capex and margin expectations, because it would only enter a closed period the following day, says Minnaar. “It should have cancelled the day rather.”
But despite Telkom’s investor relations efforts not being up to scratch, Minnaar also says the underlying news had been overwhelmingly positive and the market had overreacted, with the share sliding 10%.
First, says Minnaar, it was good that Telkom wasn’t going to pump cash into Telkom Media and the news regarding Multi-Links was also positive.
Although the strategy flip-flop with regard to Telkom Media illustrated that upper management was still thin on the experience front, Minnaar says he’d rather see it with a bit of egg on its face than proceeding with an investment that had “no business case”.
Ambekar says strategic about-turns like that of Telkom Media raised an issue with regard to management’s credibility. In some ways the decision could be seen as getting out of a direction that former CEO Molotsane had been instrumental in pursuing; on the other hand, such decisions had to have been taken by the board more generally.
Concerning Multi-Links, Minnaar says although he’d originally been sceptical on that investment – and the amount of money Telkom had paid for it – it now seemed to be a “very positive story”.
Although Minnaar didn’t necessarily agree with some of management’s forecasts – the fact that mobile operators in Nigeria had recently been prohibited from marketing their services as punishment for poor network quality – probably meant Multi-Links’ subscriber growth couldn’t be extrapolated on going forward. But he agreed it had good potential. “It could become the de facto fixed line option in Nigeria, competing with Nitel.”
Telkom spent some time at the presentation touching on customer service issues, conceding that its service levels weren’t good enough. Chief of operations Motlatsi Nzeku said: “Our service levels are definitely not where they ought to be and have been deteriorating.”
However, Telkom put that down mainly to the increased incidences of copper cable theft, saying that it paralysed parts of its access network when it occurred, clogging up its call centres. To counter that, Telkom is working on securing the more vulnerable parts of its network and converting specific parts of its access network from a fixed to a wireless network, particularly in areas where the problem of theft has reoccurred.
However, analysts didn’t buy increased incidences of cable theft as an adequate explanation of poor service levels. Says Mnguni: “They have to put numbers before us to say when these problems would be solved.”
On the whole, Mnguni says it’s worrying to see Telkom’s management struggling to make major or radical decisions. “The delays are just helping the competition and soon it will be too late for any decision to be made.”
Finweek
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