Naked, Telkom is an ugly sight
This week Telkom announced its annual results and much has been made of the telco having to write its Nigerian business, Multilinks, down to a book value of zero at a cost of R5,2-billion. This follows Multilinks’ R1,76-billion loss from the previous financial year.
But Telkom’s problems did not begin and end with Multilinks — the truth of the matter is that its core business in the fixed-line market has been steady to stagnating for years and its broadband ADSL business has been blown out of the water by failing to respond to lower pricing from new competitors.
The poor results announced by Telkom also place the spotlight on Reuben September, its chief executive, who was recently informed that his contract will not be renewed in November this year.
It is not yet clear whether he is being pushed because of poor performance or because of internal conflict with Telkom chairperson Jeff Molobela, whom September has accused of “undermining” him and acting like the chief executive of Telkom.
Either way Telkom’s recent poor financial performances signals that it is time for new leadership at the telco.
Telecoms analysts, speaking on condition of anonymity to the Mail & Guardian this week, said that the decision to invest in Multilinks in the first place was a poor decision and there should be some serious questions asked about corporate governance.
Telkom bought 75% of Multilinks, a company with net assets of R338-million, in May 2007 for $280-million (R2,1-billion).
An all-out price war between the handful of CDMA (code division multiple access) players in the Nigerian market hit Multilinks hard and the economic downturn added the double whammy, but analysts argue that the decision to invest in Multilinks was ill-advised to begin with.
One said that the decision was flawed because the CDMA technology that was used for the Multilinks network could never compete with the dominant technology in Nigeria, GSM (global system for mobile communications). A major problem with CDMA was the price of the handsets, which were much more expensive than GSM.
Another analyst said that Telkom had “completely misjudged the market in Nigeria”. Also the management of the Multilinks business post-acquisition was very poor and a decision to buy a batch of CDMA handsets was costly, with Telkom having to write down R298-million in handsets in the current financial year.
All of which makes Telkom’s decision to purchase the remaining 25% of Multilinks in January 2009 for $130-million perplexing. Analysts have consistently said that Telkom severely overpaid for the stake — the purchase price was more than three times the $44-million price tag recommended to Telkom by KPMG.
Ekwow Spio-Garbrah, a government representative on the board, was the only Telkom director to object to the sale and was subsequently fired on April 28 last year.
Telkom says that Spio-Garbrah’s directorship was terminated with effect from May 1 this year to allow for the staggering of appointments of new directors to the board.
This followed shortly after the resignation of independent Telkom director David Barber, who resigned in disgust over the way Molobela was running the board.
Telkom says that it is waiting for feedback from KPMG, which has been appointed to investigate claims against Molobela.
He had not responded to the M&G’s questions at the time of going to print.
An analyst said that the problems at Multilinks had gone on for too long and Telkom seemed reluctant to admit that there were serious problems. “Someone has to take responsibility,” the analyst said.
“The Telkom and Multilinks’ boards, as well as the top leadership, have on many occasions stated that Multilinks is a top priority for the company,” Telkom said.
It said that the average revenues per subscriber were just too low in Nigeria and that the number of subscribers had not grown as expected. “The CDMA technology has not made the expected gains in the mobile market in Nigeria and CDMA is generally more expensive for subscribers.”
Telkom said that there had been a contractual obligation on its part to buy the remaining 25% of Multilinks at a price determined by an independent auditor.
Looking at Telkom’s core business, the fixed-line market is also not very satisfying. In the past financial year Telkom has disconnected 178 000 fixed lines, a decline of 4%, which means that it services only 8.7% of the country’s population.
Telkom used to dominate the broadband market with its ADSL service, but the wireless providers have now taken over. The number of wireless broadband connections grew by 88% in 2009, about four times higher than the 21% growth in ADSL subscriber numbers.
It is estimated that Vodacom and MTN together have more than R1,8-million broadband subscribers, whereas Telkom sits with just less than 650 000.
Over the past financial year Telkom saw an 18% growth rate in its ADSL broadband subscribers, but this represents a significant slowdown in ADSL broadband growth.
Consumer activist Rudolph Muller from MyADSL attributes the slowdown to the fact that Telkom’s last cut in ADSL prices was in August 2007. Since September officially became Telkom chief executive in November that year not a single ADSL price reduction has been approved.
Telkom has made a lot of noise about its soon-to-be launched mobile service, following the sale of its 50% stake in Vodacom in May last year.
It plans to invest more than R6-billion in its mobile start-up over the next five years in an attempt to secure 10% of the market.
But the analysts who spoke to the M&G said its mobile strategy was “high risk” and they doubted Telkom would make money from it. Some even ventured that the telco would lose money on the strategy.
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