Telkom’s biggest mistake

Telkom’s selling its 50% stake in Vodacom when it did was, by no small margin, the worst business decision the company ever made.

This is no trivial comparison, as Telkom’s leadership has made some spectacular blunders over the lifetime of the company.

One of its more disastrous was a 2007 attempt to enter the Nigerian telecommunications sector by acquiring a company called Multi-Links.

Telkom sold Multi-Links again in 2011 after its failed Nigerian expansion cost the company over R7 billion.

Disposing of its stake in Vodacom dwarfs this amount several times over.

To understand the extent of the loss for Telkom, you have to start in 1993, when Vodacom was formed.

Vodacom, which launched South Africa’s first GSM network in 1994, was a joint venture between Telkom (50%), Vodafone (35%), and Venfin (15%).

In 1996, Vodafone and VenFin sold a 5% stake in Vodacom to a BEE company, Hosken Consolidated Investments Limited (HCI), for R118 million.

In 2002, HCI sold its 5% stake in Vodacom back to Vodafone and VenFin for R1.5 billion. The 1,171% profit is one of the most lucrative BEE deals in history.

When Venfin decided to sell its stake in Vodacom in 2005, Telkom passed on the opportunity. Vodafone gladly obliged for around R16 billion.

A few years later, Telkom said the joint 50% shareholding wasn’t working. The shareholder agreement also prevented it from launching its own mobile operator.

In 2008, it sold 15% of its Vodacom stake to Vodafone for approximately R22.5 billion. Half of the proceeds were paid to shareholders in a special dividend.

The remaining 35% was to be distributed to its shareholders by listing Vodacom on the JSE.

Thabo Mbeki, former President of South Africa

Rumour persists that political manoeuvrings behind the scenes partly drove the transaction.

The story goes that certain political actors needed cash, and having Telkom unbundle its Vodacom stake was a relatively quick way to raise a lot of it.

As Telkom’s major shareholder, government had to sign off on the deal, and former president Thabo Mbeki’s administration first proposed the transaction.

However, he was recalled as state president before it could go through. Mbeki’s ouster also caused a rift within the ANC, leading to the formation of a breakaway party — the Congress of the People (Cope).

Kgalema Motlanthe gave final approval for the sale in the months he served as president before South Africa’s 2009 general elections — when Jacob Zuma’s ascendancy was all but guaranteed.

Zuma reportedly tried to reverse the deal shortly after his inauguration, saying it was unacceptable that control of Vodacom had been handed to a British cellphone giant.

Industry regulator Icasa and trade union Cosatu then launched an urgent interdict the weekend before Vodacom was due to list on the JSE. Interestingly, the Zuma administration opposed the interdict.

All of this wrangling raised questions about what was really happening behind the scenes.

One beneficiary of the transaction was an empowerment group called the Elephant Consortium, which held 7% of Telkom at the time.

Mail & Guardian reported that several key figures in the ANC breakaway party, the Congress of the People (Cope), were involved in the consortium.

They had reportedly borrowed heavily against the consortium’s Telkom stake to fund the party’s election campaign.

A simple calculation showed that Vodacom’s listing unlocked more than half of the Elephant Consortium’s investment in Telkom, which it was not allowed to trade until 2011.

The consortium’s 2% share in Vodacom was worth just under R1.7 billion, and its dividend payments from Telkom were worth R692 million.

The R2.3 billion total exceeded the Elephant Consortium’s 7% shareholding in Telkom, which was valued at R2.2 billion.

Potential political machinations aside, Telkom’s decision to sell Vodacom was an unmitigated financial disaster.

The sale of its 15% stake for R22.5 billion in 2008 valued Vodacom at R150 billion.

Today, Vodacom’s market cap is R195–R205 billion, and a 15% stake would be worth R29–R30 billion.

While Telkom got a reasonable price from Vodafone, that ignores the 35% stake it unbundled to shareholders, which would have been worth over R68 billion today.

Telkom also distributed half of the proceeds from selling the 15% stake to shareholders through a special dividend.

It then proceeded to invest billions into building a competing cellular network operator, 8ta.

Not only would Telkom never have been able to catch up with the amounts of money Vodacom and MTN were investing in their networks, launching 8ta also diverted its focus away from its fixed-line business.

By not consolidating its dominant position in fixed lines — which it was handed on a silver platter through a state-sanctioned monopoly — Telkom left itself vulnerable to competition.

While trying to balance its capital expenditure between 8ta (later Telkom Mobile) and its fixed lines business, Vumatel burst into the scene.

When South African lenders saw there was a business case for deploying fibre broadband, the floodgates opened and suddenly Telkom found itself under siege.

In mobile, it was the upstart trying to take market share from Vodacom, MTN, and Cell.

However, in fixed lines, it was the entrenched monopoly everyone was trying to topple.

By 2019, it had happened — Vumatel had overtaken Telkom’s Openserve as South Africa’s largest fibre provider based on the number of homes their networks touched.

Despite its massive advantage, including a 146,000km backhaul fibre network that utterly dwarfed anyone else’s, Telkom’s split focus had allowed an upstart founded in 2014 to dethrone it.

Today, Telkom’s market cap is around R12.6 billion. In its latest annual results, it reported an after-tax profit of almost R1.34 billion.

Had it held onto 50% of Vodacom, Telkom’s market cap could have been as high as R110 billion.

It could also have laid claim to 50% of Vodacom’s last reported annual net profit of R19.26 billion.

Stated differently, all things being equal, Telkom would have made over eight times the profit last year and been worth over eight times as much — if only it kept its golden goose.

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Telkom’s biggest mistake