Telkom may have lost its way: Acting CEO

ALEC HOGG: It’s Wednesday July 28 2010 and in this special podcast we speak with the acting chief executive of Telkom, Jeffrey Hedberg. Jeffrey, I think the big story about Telkom is, when one has a look at the different market caps, R17.5bn is what Telkom is worth today, MTN is worth over R200bn, Vodacom nearly R100bn and so the upside is enormous. The question is, are you the man to take Telkom there?

JEFFREY HEDBERG: Well, I’m very honoured to have been asked to lead Telkom in an acting group chief executive role, particularly given that I’m the kid from Boston. It is a great honour, I think there are a number of opportunities as well as challenges within Telkom but certainly one of the key things that I wanted to do, is over the first two weeks that I’ve been here, is to try and define a five point plan in order to drive the company and ensure that we’re aligned and all focused on the same goals. Because there is an upside, yes.

ALEC HOGG: This plan and we’ll get into it in a moment, presumably, required you to do quite a lot of research. While you were at Cell C, you would have looked at Telkom from the outside and maybe you’ve been scratching your head on a few things. What’s been scratching many investors’ heads, is that around the world, the incumbent, the fixed line operator, has generally become the dominant player in deregulation. You look at Britain with BT, you look at Germany with Deutsche Telekom, yet in South Africa, Telkom has almost disappeared. Why do you think this is?

JEFFREY HEDBERG: I think there are a number of reasons; I think the first is that there was a great reliance on Vodacom, in terms of delivering a lot of the cash flows and delivering a lot of the dividends. I think there was also a lack of real, clear policy in terms of how regulation or deregulation was going to be taking place. I think Telkom has a great set of assets, that’s been evident through the World Cup performance. I think it may have lost its way a little in terms of clarity about strategy, clarity in communicating what that strategy should be. So, I think having worked at Deutsch Telekom, I was on the board of Deutsch Telekom and at Swisscom, I understand these environments quite well. I think that one of the key issues is that both those companies’ mobile was owned 100%. I do see upside, the people are great, the assets are great, it’s just now about execution and delivering across these different initiatives.

ALEC HOGG: So, mobile being the big opportunity. Is Telkom too late to the party?

JEFFREY HEDBERG: I think it’s a challenging situation. Certainly from my Cell C background, when I started there and MTN and Vodacom had an eight-year head start. I think when I started, Cell C was in its fifth year and it is hard to catch up, even with a three player market, as a fourth player it is hard. What I do believe that’s quite interesting is what Telkom has, it has an ability to be able to package both the mobile broadband, as well as the DSL offerings or just basic voice and data. So, I think as the mobile operators start moving from mobile into fixed, there is a great opportunity for Telkom to moved from fixed into mobile. So, if it were to be a pure play, Alec, I think it would be very challenging but the fact that we have access to the enterprise customers, that we have a DSL offering that we can start to bundle with some of the things that we’re going to be doing on the mobile. There’s a lot of synergy between the fixed line network and the mobile network that we’re building up. I think in combination this would be an important initiative for Telkom, just because if you do not have a mobile offering, particularly as these technologies evolve, it puts you on the back foot, particularly when the mobile operators are moving into the fixed line space.

ALEC HOGG: There must have been a lot that you learnt from the strategy at Swisscom and Deutsche that you can apply here?

JEFFREY HEDBERG: There is some, and one of the key things is, if you can align and mobilise people and get everybody marching and singing and dancing in the same direction, it’s amazing what power that can bring. It is a great set of assets here and I think they need to be now managed with a team. There’s been too much discussion around individuals and too little about what Telkom can actually deliver on the ground. With some alignment and with some focus and transparency, I’m looking forward to working with the team to drive that forward.

ALEC HOGG: Nobody knows the future, excepting the big guy up in the sky but with Dimension Data tying up now with NTT, the second biggest operator, Telkom’s operator in the world. That surely would bring yet another challenge to the South African telecoms equation?

JEFFREY HEDBERG: Yes. I’m a big believer in competition, I think it allows companies to get a little more flexible, a little more responsive and that will be a very interesting competitor. We do a lot of business with Dimension Data as well and sometimes you’re competitors in certain deals or you’re partners in other deals. So, I think it’s good for the customer, it’s good for the choice that is provided to the customer and that’s what’s good about competition, it forces companies like Telkom to respond. In the absence of that, I don’t think I’d have much of a mandate because there wouldn’t be much momentum to respond.

ALEC HOGG: Have you engaged much with government, given that it is a 39% shareholder, at the moment, in Telkom?

JEFFREY HEDBERG: I’ve had one meeting with the ministry. Again, I’ve only been here for two weeks but have had one meeting with the ministry, discussing feedback on what was going on in the World Cup and they were very delighted with that and other issues. So, obviously, they are a big shareholder and they want to make sure that shareholding increases in value and we, at the same time, recognise that they’re not only a shareholder but they’re also very key in terms of defining policy. So that engagement is going to be both very, very important. They will be an investor, a shareholder and at the same time, they’re a policy maker. So, that interaction will be extremely important as we move forward.

ALEC HOGG: Is there any indication – and I ask this because the investment community believes it would be the right thing – is there any indication that government will sell its share or at least, I think, the golden share rule falls away soon, doesn’t it?

JEFFREY HEDBERG: Yes. That’s up to government and their advisors to define the right time and the exchange ratio that they would agree to and the form of that placement. Beyond my mandate, my mandate is to do what I can with the team in order to take advantage of the upside that you noted earlier.

ALEC HOGG: But the reality is that there’s been no indication yet from government that it would be prepared to divest?

JEFFREY HEDBERG: None that I am aware of.

ALEC HOGG: One of the big challenges that you have is something that you’re pretty close to, Jack Welsch says ‘When you have a subsidiary that is a troublesome, you fix it close it or sell it.’ Now the troublesome subsidiary for Telkom, is one that was only recently bought, the Nigerian operation, Multi-Links, which you, in fact, run. Is it rescuable?

JEFFREY HEDBERG: I think I’ve been there for the last five and a half months, if I can take just one minute to give you a sense, I think it’s important. I think strategically, the company is challenged on the CDMA voice side, just because it has 2.6% market share. The CDMA operators all combined, there are four of them; aggregately only have 10%, the other 90% is GSM. So in terms of scale in channels, scale in getting the right handsets at the right time, it’s strategically very challenging because it’s small. Secondly, because of that size, there’s also requirement to subsidise handsets, which the GSM operators do not have, which puts further pressure on the margin. Finally, there have been a number of contracts that have been engaged in, we call them ‘The Big 5′, that represent aggregately 75% – 80% of total operating expenditure. These are exclusive in some cases and increase over time, which makes it very difficult because you only have 20% – 25% opex in order to fuel growth that needs to drive itself beyond those costs. So, we’re in the process right now of trying to re-negotiate those contracts. We’re in the process of putting new offers in the market. I’ve built a very good team there right now. So, on one hand, I think we need to fix the basics, if you will, but at the same time we need to, in a parallel fashion, look at how we fix the future because I think that gives the strategic advantages and given the commercial realities on the ground, a stand alone play is very difficult. So therefore, I think that we need to look to partner with another entity, in order both to bulk up, as well as to minimise the risk that Telkom has with this asset.

ALEC HOGG: What happened to those talks? There’s been much confused reporting around the discussion or apparent discussions with Starcoms, which is a listed company in Nigeria, that possibly there could be a merger.

JEFFREY HEDBERG: Yes, I think there have been discussions with a number of players in the past. That was before my time. There have been a couple of expressions of interest but I think right now, what we want to do is, we want to fix the basics. We want to engage but there are no real deep discussions at this point in time at all because you don’t buy high and then sell low. So, I think we need to fix the business in order to be in a position to merge it with another entity. If we don’t, then there’ll be a number of representations, warranties, covenants, which will likely put the risk back on us. So, we’re trying to fix the business and not for the next two years but over the next couple of quarters. At the same time, see whether some of these expressions of interest are tyre kicking or whether there’s a genuine interest that makes strategic sense for us to enter in to. There’s a very interesting piece of the business, which is the enterprise data piece, we have seven thousand kilometers of fiber in the ground there, five thousand of our own and the other two thousand through swaps with MTN and Glo. There’s a tremendous opportunity to provide enterprise services there. The dog of the business, Alec, if you will, is the CDMA voice.

ALEC HOGG: Indeed. It sounds eminently sensible and given that Nigeria is an important part of any African company’s strategy, one can understand what you’ve said there. Just looking briefly at your five point strategy, my question really is, you’re an acting chief executive, you haven’t been confirmed as chief executive, although I believe your hat is in the ring. Why come out now with a five point strategy that perhaps another CEO might not be too keen on?

JEFFREY HEDBERG: Yes, I think there are two points. One, this five point plan is rather tactical, I think it is clearly driven by the strategy that’s been approved by the board but I think it needed to be tactical in nature, just to make it more precise and easier to communicate internally. Secondly, there is a clear need for speed within Telkom. I think another four, six, eight, whatever number of months for me just doing what’s been done in the past, I wouldn’t be doing my job and this is quite a personally and professionally fulfilling opportunity that’s been presented to myself. So I want to drive things and I’ll work with the board and the team to make sure that whatever the end result is, that there’s some momentum and some good impulses within the organisation.

ALEC HOGG: Your five point strategy focuses on Multi-Links, which we discussed now and I suppose apple pie and motherhood stuff like good leadership, cash flow improvement but the other part, the other two parts of the prong is Telkom mobile and broadband. If we can just dwell a little first on Telkom mobile, has the launch of this very exciting initiative been put back a little through the resignations of your predecessor, Ruben September and now your chief financial officer, Peter Nelson?

JEFFREY HEDBERG: No, I don’t think that’s had an impact on the launch date at all. I think there’s been a lot of very good work done by the team, particularly on the back end. They are building the network, there’s the roaming agreement that’s been signed with MTN, a number of very advanced co-location discussions, there’s a lot of work going on the IT and integrating the IT in the network element. So, the back end is moving along and the team is very engaged and energised. Where we need to focus a lot of our time is on the commercial side. That’s particularly, what offers are we bringing in, are we going to bundle those with some of the fixed line initiatives that we have in place. Then finally, how are we going to ensure that within the channel, within the distribution, that we’re getting the appropriate presence in terms of acceptability to the organisation or to the customers through that organisation. Such as when a customer wants to have a Telkom mobile service, they can go in and find it. So there’ll be a lot of work over the next couple of months, looking at the right offer and at the right way in which to distribute that offer.

ALEC HOGG: Being from Boston, you would have noted the success and continued success of Apple with its iPad and its iPhone, do you have any intention of bringing that or being another supplier of say, the iPhone or new supplier of iPad into South Africa?

JEFFREY HEDBERG: I think we’re looking at a number of ways that we can, for different segments of the markets. Is there a way that we can bundle our DSL with a 3G offering and a computer, particularly in order to drive internet penetration within South Africa. Then similarly on the other side, we’re looking at a number of deals that we would do with some of the handset suppliers. The trouble is if you’re small and just starting out, it’s hard to go to any muffled negotiation table with some of these organisations. Our focus right now is the launch, making sure that we’re bundling some services together that make sense for the customer, making sure that we also get the after-sales support algorithms sorted out because it’s a very competitive environment, both on the fixed and the mobile side. A lot of it is going to be around service, so the whiz bang things, Alec, I would say, we’ll wait until we have a little momentum and a little muscle to move in but we’ll obviously be open to ways to differentiate ourselves. If there is a way that we can partner with one of those entities, I look forward to it.

ALEC HOGG: Just to close off with, the other prong of your five point strategy is broadband. It is an area where, through your fixed line you should have an advantage anyway but this convergence of fixed line and mobile, do you see that as, perhaps, the trump card in your hand?

JEFFREY HEDBERG: I see it as a key source of differentiation. We’ve seen a lot of the mobile operators moving into the fixed line in order to provide that converged play. Similarly, I think with the fixed line that we have, there’s an opportunity for us to do that. I’d like to move beyond words like convergence, bundling and all of those and look at specific offers that we can provide to specific segments. So, if we can get an offer that has a 3G capability, we could provide DSL, we can ensure that there’s a dongle that can be attached to the laptop and put that all in a bundle and provide that to a particular customer segment. I think that will allow differentiation and similarly there’s a big source of revenue and growth within the market, which is on the enterprise side and with those enterprises, they want a mobile capability to offer to their employees and potentially to on-sell customers. I think with our base, there is a great opportunity to start to specifically bundle some of these things and as a pure play, I think it would be tough. Again, given my Cell C experience but with some of the assets that we have and some of the things that we’re thinking about and as technology evolves, I think a customer just wants to have a capability to get a lot of his communication requirements dealt with by one entity. If we can provide the service and the pricing and the quality around that, I think we will be in a good position.

ALEC HOGG: Jeffrey Hedberg, the acting chief executive of Telkom.

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Telkom may have lost its way: Acting CEO