Without a mobile business, Telkom has no future. Without mobile, it can kiss goodbye any realistic hopes of remaining relevant to consumers. In fact, Neotel gives you a good indication of what Telkom would look like without a mobile business.
Speculation seems to surface every few weeks that links 8.ta to some sort of corporate action. No doubt there are bankers making a fortune by putting together investment cases and shopping around for deals.
First it was Cell C merging with 8.ta. Then Sunday saw further tenuous rumours about Bharti Airtel sniffing around.
There’s no doubt Alan Knott-Craig would like Cell C to get its hands on Telkom’s mobile business. Right now Cell C needs the scale to compete with Vodacom and MTN. Except it’s not that simple.
What would Cell C/MTN/Vodacom/<insert name of foreign ‘suitor’ here> be merging with anyway?
No-one can simply buy the mobile network’s fixed assets because they’re part of Telkom’s core network.
Telkom’s entire mobile business is built on top of its existing core fixed-line network. This explains why it’s only spent R3.369bn on mobile capital expenditure to date (as at September). In total! This year, Vodacom will spend around R7bn on capex in South Africa.
For MTN that number’s not too far away. On mobile only, Telkom will spend in the region of R1.5bn.
So far, Telkom’s mobile business has just over 2 000 base stations (all 3G-enabled and most likely ready for LTE). By comparison, Vodacom has 6 200 3G base stations (as at September 30); its enabling about 1000 per year.
Telkom is catching up quickly. Already it’s carrying 65% of voice and 94% of data traffic on its own network (and not on MTN’s which it uses under a roaming deal).
So what can a suitor buy?
Imagine trying to merge Cell C’s backbone and base station network (which it’s built out at great expense and then sold off to lease back) with Telkom’s mobile network?
That said, it’s not impossible and those numbers probably make sense five or eight years out. But there’s no obvious rationale in the short-to-medium term.
Add to this the fact that Telkom’s mobile billing and back office systems too are intricately linked to that of the fixed-line business. They have to be. This is the only way the operator will be in a position to offer true converged products and services from next year, which it is doing. How do you divorce that?
Finally, from a strategy (and shareholder) point of view, there’s little to no visibility. The chaos surrounding Telkom’s strategy and government’s involvement in setting that strategy has been well documented over recent months.
The minister of communications has promised clarity by March or April, as if some sort of strategy document will descend on a cloud from the heavens. We’ll have to wait and see.
Telkom will not merge with another operator (Cell C) nor sell a portion of its business without government’s blessing, despite all the deals that are being constructed by bankers and the ‘talks’ that are being held ‘informally.’ We’ve seen this all before. Remember the MTN-Telkom merger? The KT Corp deal?
Perhaps a transaction will give Telkom scale, expertise and capital to fund its ambitions? Although what scale does Cell C realistically add? And arguably, it doesn’t need the expertise either, given what it’s achieved with its mobile network-build so far.
The one curious aspect to Telkom’s spending on its fixed-line and mobile networks to date, and importantly its projections going forward, is that it sees investment in mobile of “R18bn-R21bn over the next three years.” Those numbers simply don’t tie up with its rate of investment to date.
Then again, there’s a lot of work to do on its core network. The previous next-generation-network (NGN) programme has run its course, and there’s now a dire need for another big network upgrade project.
There’s one valuable asset that only Telkom has though: spectrum. Given the paralysis surrounding the allocation of scarce and valuable spectrum for LTE and next-generation services, this spectrum could be the sole reason for attempting to engineer any sort of deal.
I wouldn’t be holding my breath. But then again, we’ve seen some strange decisions made by government regarding Telkom in the past 12 months.
The board and executive team know that (very simplistically) Telkom needs to become 8.ta. Without this massive change, Telkom is dead and irrelevant in a decade’s time. It’s as simple as that.
*Hilton Tarrant contributes to “Broadband”, a column on Moneyweb every Wednesday covering the ICT sector in South Africa.