The future of fixed line
TELKOM NEEDS TO FOCUS far more aggressively on increasing South Africa’s broadband penetration and invest heavily in its network if it’s to have a sustainable future. That’s where a "visionary" new investor could play an important role, says Kristoff Puelinkcx, managing partner at Delta Partners.
Delta is a telecoms advisory and investment firm focusing on Africa and the Middle East conducting specialised consulting, private equity and corporate finance work. It announced recently it would open an office in South Africa, specifically in Sandton, as a base to drive additional deal flow for itself in sub-Saharan Africa.
Puelinkcx says of all the recently announced prospective corporate action in the sector, it’s become even more necessary for Telkom to broker some sort of deal than it is for MTN, which he rates as probably Africa’s best performing mobile operator. That was based on just about any key performance indicator (KPI). "MTN has built a successful model and proven it can expand into new markets. It doesn’t need anyone else."
Which isn’t to say a deal in India – it remains locked in talks with Reliance Communications – might not make sense. Puelinkcx says such a deal would give it the opportunity to expand in a new, fast-growing market that’s otherwise difficult to penetrate – and vice versa for Reliance. But if the deal doesn’t happen that would be fine for MTN.
And if it does become someone else’s lunch? Says Puelinkcx: "MTN will sell itself expensively – and it should." However, any buyer would then have to believe it could still extract additional value on top of the premium it paid over the next five years.
As for Telkom, Puelinkcx says the market is clearly expecting a deal. As to whether the two on the table would succeed, he says it’s difficult to tell with Government its biggest shareholder. But as to whether it made economic sense, Puelinkcx says it’s Mvelaphanda Holdings, Och-Ziff Capital Management Group and other funders for the entire issued share capital of Telkom – but with the proviso the Vodacom stake is unbundled; and from Vodafone for another 12,5% stake in Vodacom believed to be valued at around R19bn. It would also want to see the rest of its stake in Vodacom unbundled to shareholders. Either way, it seems Vodacom will be listed.
Puelinkcx says Telkom’s cost base is way too high and it needs to invest heavily in its network. If a new investor would come into the fixed line operations and drive a new strategy rather than focus entirely on short-term profitability, that would be good for the consumer and good for the company’s sustainability. It would also be good for SA, as higher broadband penetration drives economic growth.
Though Telkom still needs to retain existing revenue, this short-term focus shouldn’t be all encompassing. The management team needed more support from shareholders, Puelinkcx says. "There’s still a lot of investment required, so you need a new investor with a big stomach," he says.
Broadband penetration in SA is still way too low and prices too high, says Puelinkcx. Telkom needs to work with Government with regard to increasing access to PCs, and cut broadband prices dramatically to drive penetration aggressively. Telkom also needs to focus more on the corporate space, further developing and consolidating its position in managed services.
Puelinkcx says Telkom’s management team at least has more focus and vision than a year ago. But it wasn’t clear how much support it receives from its shareholders.
Puelinkcx says it is common for governments to hang on to a stake in their country’s fixed line incumbent. That’s fine – as long as it plays the role of owner instead of manager and gives the managers and other investors more freedom to develop the company and innovate. "It needs to be as visionary as the new investors coming in… Any new investor needs to put the right conditions forward."
Puelinkcx says while the market previously proclaimed the death of fixed line, it became "very sexy" again three or four years ago in developed markets, as people realised the huge opportunity that having broadband to the home presented in terms of delivering other services to consumers. Being able to bundle voice, broadband and TV together and deliver it over the same pipe was particularly attractive, although the latter didn’t mean necessarily providing the content.
The future of fixed line, says Puelinkcx, is to reinvent itself while protecting its revenue per user numbers and developing new revenue sources and drivers. But broadband is the first fundamental premise.
Finweek
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