Telkom – change in sight?
Inefficient management in any business is probably one of the biggest downside risks for minority shareholders as this normally leads to the inefficient allocation of capital and in the long run, a destruction of shareholder wealth.
It is therefore no wonder that Telkom shareholders are getting increasingly agitated with the lack of leadership in the company and the inability to either do a deal or get on with business.
Telkom’s monopoly in the telecommunications industry is coming under increasing pressure and decisive management action is required to steer the company through what is likely to be very tough times. The arrival of cellular operators and a second network operator have and will make the company’s life more difficult in future. Telkom needs to act. Fast!
Telkom has disseminated around 15 statements via the stock exchange news service (SENS) over the past 12 months, which dealt with announcements concerning corporate action in one form or another.
Both Reuben September, CEO of Telkom LTD, South Africa’s first fixed-line operator and Alan Knott-Craig, ex-CEO of Vodacom, South Africa’s largest cellular operator have publicly been stating that their respective companies needed to part ways in order to reach their stated strategies. Telkom owns 50% of Vodacom, the remainder being in Vodafone’s hands, a British based cellular provider.
The past 12 months have seen numerous parties approach the fixed line operator regarding a potential deal. MTN and Oger Telecom, Cell C’s parent, were independently involved in talks with Telkom in the latter part of 2007, which did not come to fruition. In a meeting with Oger Telecom’s CEO in Istanbul, their rationale for a deal made sense, at least to an outsider.
Another potential deal announced on SENS in mid 2008, involving a consortium comprising Mvelaphanda Holdings, Och-Ziff Capital Management and other funders was never expected to fly. This has been confirmed in an announcement released on 18 September 2008, which stated that discussions have been suspended due to current market conditions and pricing considerations.
In 2007, in conjunction with MTN’s proposal to buy Telkom’s fixed line business, Vodafone has widely been anticipated to buy the Telkom stake in Vodacom. Vodafone currently own half of Vodacom. The market’s previous expectation of Vodafone buying the entire stake has steadily been reducing and now they are only expected to acquire 12.5% of Vodacom at a price of R18.75bn.
This values the whole of Vodacom at R150bn or R144 per Telkom share. Telkom are then expected to unbundle their remaining Vodacom stake to shareholders and list it on the JSE. A sale taking place at the implied R150bn for Vodacom, however, seems unlikely given current market conditions and judging from recent share price action. Vodacom’s recent BEE deal valued Vodacom’s South African operations at R120bn or R115 per Telkom share.
Considering Telkom is now trading at R110 a share, Yebu Yethu BEE participants will likely be most perturbed as the Telkom market price includes all its operations – its fixed line business, all its Vodacom and its African operations. The implication is that the BEE deal overvalued Vodacom. Alternatively of course, one could argue that the market is undervaluing Telkom. The fixed line business in its own right is expected to produce a profit of R4.3bn, an equivalent of R8.23 per share in financial 2009.
One can only speculate why an announcement which seems imminent is taking forever. The logical impediment, given the crucial strategic rationale for doing this transaction for all parties involved, is one of price. The entire emerging markets telecoms universe has come under extreme pressure of late (see graph), a fact Vodafone would be well aware of.
Our view though is that Telkom management needs to decide whether they want to do deals or focus on running the business. Whatever route they take, maximizing shareholder value should be the ultimate objective.
Moneyweb
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