Telkom: For yourself?
Although it seems inevitable that there will be action at some stage – the market agrees the joint venture arrangement that Telkom and Vodafone currently have in their ownership of Vodacom is unsustainable and Telkom is seriously reviewing its mobile strategy – it is still anyone’s guess as to how all of this will pan out.
Things also change as they go along.
When Finweek asked last year whether Telkom could sell its Vodacom stake to Vodafone and buy MTN, it had it on good authority that this was seriously being investigated.
But, that was before MTN concluded its Investcom deal. After Investcom, MTN was probably too big and too expensive to make that permutation likely.
The other permutation that has been bandied around more recently; that MTN could in fact buy Telkom, seems to make little sense.
Why would MTN buy a fixed line operator that’s facing a more competitive market?
Valuations and aspirations aside (MTN doesn’t want to be a fixed-line operator even though it is investigating self providing some fixed line links) the acquisition would treble MTN’s employee base, and given that staff costs are one of the biggest – and in most cases the single biggest – operational expenses faced by a telecoms operator, this hardly seems wise.
Also, buying Telkom would result in MTN taking a few steps back in its goal of geographic diversification, something that it has successfully worked towards over the past few years.
That diversification has been the right strategy is evidenced by the recent regulatory impasse in Benin. Despite temporarily suspending its network in that country, MTN’s share price seemed to shrug the news off.
Telkom’s mobile strategy
Meanwhile, the market eagerly awaits the outcome of Telkom’s review of its mobile strategy.
The market could frown on selling its Vodacom stake, and Telkom would no doubt have to think very carefully before agreeing to let go of such a premium asset. Vodafone would have to pay top dollar before Telkom shareholders would be happy sell.
On the other hand, investors might be pleased with a large cash distribution from Telkom. But, they would have to be convinced that it has suitable alternate plans in place for growth in order for them to remain on board as shareholders in the post-Vodacom era.
One possible contingency plan that’s gaining momentum, we’re told reliably, is Telkom potentially buying Cell C.
The parties themselves deny this.
Telkom corporate communications executive Lulu Letlape said if it had any imminent corporate action on the cards, it would issue a cautionary announcement to the market.
And Cell C’s chief corporate officer Zeona Motshabi says nothing has changed since the company told the market in June that the shareholders were not selling. Motshabi reiterated that Cell C was happy with the company’s recent performance, and the shareholders were not in discussions with anybody.
Potential options
But official denials aside, there must be a range of potential options that Telkom is currently exploring, of which buying Cell C is likely to be one.
If the parties can agree on a price, this would give Telkom an extensive mobile network (80% of calls are carried on its own network) and around 3m customers at a fraction of the price that it would have had to pay for MTN a year or two ago. Cell C is undoubtedly the underdog in the SA mobile market, but 3m customers is nothing to be sneezed at either. It’s a good start.
Cell C would give also Telkom a base to which it could sell additional products, like cut-price pay TV and lower cost broadband. Having a wholly owned mobile division would enable Telkom to really work toward the triple and even quadruple play – selling fixed and mobile voice, broadband and entertainment services bundled onto a single bill. It could also offer services out of a converged fixed and mobile retail presence.
Cross selling and bundling is an ideal that Telkom and Vodacom have talked about for some time. But, a truly seamless offering – over a single billing system – seems unlikely while Telkom is not the only shareholder in Vodacom.
Cell C’s biggest issue is a restructuring of its debt. The company has said it was looking at different options to improve the capital structure.
Telkom’s financial muscle would no doubt help on that score.
Can the sums add up for Telkom shareholders? We’ll have to wait and see. A cautionary announcement could still be weeks or even months away. It all turns on what Telkom decides its mobile strategy needs to be. And perhaps it wants to first appoint a permanent CEO before this is cast in ink.
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