Dramatic telecoms shake-up
THE South African telecoms industry is entering a dramatic period of potentially large scale reorganisation. On the MTN side of the equation, the talks with India’s second largest telecoms company, Reliance Communications, have been the subject of huge press speculation over the past few weeks, and more details on the talks are likely this week.
But the other side of the equation, the complex Telkom, Vodacom, and Vodafone relationship may well be the arena of substantial reorganisation too, starting today.
Telkom is likely to issue a JSE announcement this morning saying it has received a bid for the whole of group, which according to the Sunday Times would value Telkom at R90bn.
At first blush, this looks impossible as the government and Public Investment Corporation (PIC) hold more than 50% of the group. Neither side is commenting officially, but apparently the idea is for the government and PIC to retain their majority holdings in Telkom but at the same time perhaps relinquish their hold on Vodacom, effectively held in a pyramid structure through Telkom’s 50% stake. Vodacom would then split out into a separate company and list separately on the JSE. This might involve an increased stake for Vodafone, which could also separately join the fray.
The bid is being made by a group of investors, which is led by Mvelaphanda Holdings but includes a substantial black empowerment grouping outside of the Mvela stable.
But despite the presence of sufficient BEE representation to satisfy trade and industry guidelines, it’s not likely to be a BEE bid in a true sense. It includes financial backing from US and Middle East hedge funds, including the US-based Och-Ziff and the Saudi Oger Group, investors in Cell-C.
What is not known is how the Telkom board will view this proposal. Yet the logic of splitting out the Vodacom stake seems unassailable. Even the most cursory comparison with MTN suggests an enormous value trap locked up in the Telkom-Vodacom structure.
Vodacom has 34-million users, compared with MTN’s 68-million; in other words, neatly half. MTN’s market capitalisation, albeit including lots of bid froth, is R283bn.
Halve that and you get R141bn. Compare it with Telkom’s measly R73bn market cap, and it appears Telkom (excluding its Vodacom stake) is valued not as free — it’s valued at a 100% discount!
Doing the calculation based on subscriber numbers of Vodacom and MTN is generous to Telkom. The same sum based on profitability or revenue of MTN compared with Vodacom gets you to a roughly similar, or even higher, level of discount.
The relationship between Telkom and Vodacom has been immensely strained, most obviously suggested by the fact that they market their services separately. Notional synergies between the two groups simply do not exist, hence the logic of keeping them in the same family falls away. Furthermore, the way technology is unfolding, with Telkom offering broadband in DSL format and Vodacom in HSDPA format, suggests they are moving apart.
Yet as attractive as the split out strategy is, it seems unlikely the Mvela-led consortium will have things all their own way. Already an alternative bid is in the works, led by businessman Barend Hendricks, which according to the Sunday Times has better support within ANC leadership. Whether or not this is true remains to be seen, but what is known is that Mvela’s bid is fully financed. The group’s letter to Telkom includes impeccable funding credentials. And as mentioned previously, Vodafone could make an independent bid.
The proposal is a sequel to earlier talks between Telkom, MTN and Vodacom about their different relationships, which broke down earlier this year.
The idea at that point was for Vodafone to take over a majority stake in Vodacom, while MTN would take over Telkom, but the deal broke down for a variety of different reasons, mostly it seems because MTN wanted to stay a purely cellphone player, while the complexity of the government’s role was never clearly resolved. This was followed by Vodacom’s decision to make a BEE offering, which has since been announced.
Clearly, that was a bit of a prelude to pressing the idea that Vodacom would split from Telkom. The split seems technologically, financially and logically sound.
For Telkom it means that it, rather than the cell companies, will be the national champion. It also means it will be free to embark on its own cell strategy.
But it does all hinge of a decision by Telkom, and that means effectively a decision from the government. Whether that will be forthcoming remains to be seen.
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