Telkom’s plan to unlock shareholder value

Telkom is planning to unlock shareholder value by bringing in new shareholders in its Gyro mast and tower business, Openserve, and its data centre business.

This is feedback from Telkom CEO Sipho Maseko, who was speaking to Business Day TV about the company’s future plans.

Maseko said there is a lot of value trapped in its Gyro mast and tower, Openserve, and data centre businesses.

“If you look at Telkom’s enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio, it is around 2 to 2.5 times,” he said.

“If you look at our standalone businesses – like towers, data centres, and fibre – they are trading at multiple that in the order of 10 to 20 times EV to EBIDTA.”

To unlock this value, Telkom is looking to get new investors in its Gyro, Openserve, and data centre businesses.

Maseko said they have completed a “market sounding process” with potential Gyro’s mast and tower investors.

The process involved asking investors how they would like to see a deal work where they are preferred partners of Gyro’s mast and tower portfolio.

Apart from clarity on expectations for investors, the process also helped Telkom to establish who it wants to partner with.

“We are now clear as to what this business’ valuation would be, and we are looking to conclude this deal by the end of this financial year,” Maseko said.

The process will not stop here. Maseko said this is a strategic journey for Telkom to unlock value for shareholders.

“After we have done Gyro masts and towers, we will be looking at Openserve and our data centre infrastructure business,” he said.

The company said it is planning to create a new vendor-neutral data centre business, similar to Teraco and Africa Data Centres.

Teraco has shown the potential of this market and has recently begun construction on a new hyperscale data centre with 38MW of critical power load in Ekurhuleni, South Africa.

Africa Data Centres, in turn, has recently acquired Standard Bank’s tier four data centre in Samrand, north of Johannesburg.

Telkom valuation versus similar businesses

To understand Maseko’s concern over Telkom’s low EV to EBIDTA, it is informative to look at its individual business units and the valuations of its competitors.

Openserve is South Africa’s largest telecommunications infrastructure provider with an extensive fibre network.

In the fibre market, CIVH, which owns Vumatel and DFA, is Openserve’s biggest competitor.

Despite the fact that CIVH is much smaller than Openserve and makes less money, it is valued at R18.5 billion – more than the whole of Telkom.

Teraco is South Africa’s dominant player in the data centre market and in 2019 was speculated to be worth between $600 billion (R9.3 billion) and $1 billion (R16.5 billion).

Telkom Mobile is South Africa’s third-largest mobile operator with 6,159 LTE sites, 9.6 million subscribers, and R9.4 billion in revenue.

Rain, in comparison, has around 500,000 subscribers, 5,500 4G sites, and 447 5G sites. It is valued at R15.03 billion.

If one considers Telkom’s extensive assets and the valuations of its competitors, its current market cap of around R16 billion looks undervalued.

Telkom comment

Telkom spokesperson Mooketsi Mocumi explained they are exploring ways to unlock trapped value in the current conglomerate structure.

“Once we have completed the market sounding process Telkom will be in a position to determine the nature of a suitable transaction that can achieve the unlocking of value,” said Mocumi.

“The money will afford management flexibility to rebase the balance sheet, reinvest or to reward shareholders.”

Sipho Maseko interview

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Telkom’s plan to unlock shareholder value