Telkom, Vodacom divorce long overdue
On November 19 2004, the FM ran a cover story with the headline: “The case for breaking up Telkom”. We argued at the time that the fixed-line operator should be forced by government to sell its 50% shareholding in Vodacom as this was the best — and possibly only — way to spur real competition in the telecommunications industry.
Four years later, Telkom has done exactly that — ironically, voluntarily — by agreeing to end its troubled ties with the cellular operator. The planned sale of 15% of its stake in Vodacom to the UK’s Vodafone for R22,5bn and its intention to unbundle the remaining 35% it owns to Telkom shareholders portends dramatic changes in the sector — and, potentially, a new era of more robust competition that should drive down telecom prices.
This is one break-up that everyone, from the operators themselves to consumers and the regulator, will be cheering.
“It’s a good deal and it’s long overdue,” says Denis Smit, MD of market research and consulting firm BMI-TechKnowledge. “It takes away the uncertainty.”
Not only does it free Telkom to make acquisitions it wouldn’t have been able to consider previously — Cell C, perhaps? — it also allows it to compete directly with Vodacom and MTN for the first time.
Telkom is spending R1,7bn — this figure may rise if consumer demand requires it — on a third-generation cellular network that will enable it to provide mobile data and voice services.
Telkom will, in effect, become the country’s fourth mobile operator, says Smit, though the company is playing this down, saying it will use the new network to serve areas not well covered by its fixed-line broadband infrastructure.
The operator will use the same 3G high-speed packet access technology employed by Vodacom and MTN to offer wireless broadband services. Because the system is the same, Telkom will be able to take advantage of the fact that there are already millions of handsets in the market able to connect to its network.
Analysts say the Vodafone deal, when it happens, will serve to focus Telkom management. For years, the company has enjoyed enormous dividends and profits from the cellular operator. In the 2008 financial year, Vodacom declared a dividend of R5,9bn, 50% of which went directly into Telkom’s coffers.
Now, without its mobile arm, analysts say Telkom will have to focus that much harder on investing in and making money from its fixed-line assets. That means driving up broadband penetration by reducing costs, extending network coverage and improving customer service — a tall order for a company that in many respects still behaves like a state-owned utility.
Ratings agency Moody’s has warned that it could downgrade Telkom if the Vodacom sales goes ahead. “The rating impact of this disposal is vitally dependent on the final use of proceeds,” Moody’s said in a statement on Tuesday. Telkom has not said what it will do with the proceeds from the proposed Vodafone deal.
“Telkom’s stake in Vodacom is a key operational and financial asset of the group and Moody’s will assess the interplay between the to-be-determined capital structure of the new Telkom and its business strategy (specifically with respect to fixed and mobile expansion), in assessing its credit quality after the disposal process has been formalised,” the ratings agency said.
Though investors can expect a multibillion-rand special dividend after the sale of 15% of Vodacom, investors are unlikely to reap big rewards from Telkom in the next few years. In fact, if the company follows trends in other markets, it will be lucky if a hole isn’t torn through its bottom line as price pressures in the industry intensify.
The Vodacom sale has hurdles to overcome, though. Telkom says the proposed transaction enjoys the backing of government but adds that it is still “subject to the finalisation of the transaction agreements”.
Government may also still seek guarantees from Vodafone. Communications department director-general Lyndall Shope-Mafole declines to comment, saying only that the transaction is a matter for discussion between the shareholders.
Government has not formally communicated its views. Last Wednesday cabinet was asked to consider the deal but, oddly, the statement that followed the meeting made no reference to this. Cabinet spokesman Themba Maseko was not available for comment.
The deal will, however, not extricate government from the sector — to the dismay of most in the industry. On the contrary, it will give the state a direct, 13,8% stake in Vodacom; it currently holds 19,5% but this is indirect through its 39,4% stake in Telkom. The Public Investment Corp, government’s pension fund administrator, will also pick up a direct, 5,3% stake in the cellular operator.
“Government is certainly not disengaging,” says BMI-T’s Smit.
Andile Ngcaba’s Elephant Consortium, which holds 5,8% of Telkom, is set to receive a 2% stake in Vodacom. Ngcaba says he has held no talks with other shareholders in the Elephant Consortium about what it might do with the Vodacom shares.
But it is possible that government will have to sell a portion of the equity it will receive in Vodacom to facilitate a listing on the JSE. The bourse requires that new main board listings have a free float of at least 20% but Vodafone, government and the PIC will together hold 84,1% of Vodacom.
A well-placed source says discussions are taking place with government and other Telkom shareholders to resolve the problem.
This is all good news. Our 2004 argument still holds: any move to reduce government’s involvement in the telecom sector must be warmly welcomed and actively encouraged.
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