TELKOM is on its deathbed. Its heart is still beating valiantly, but cynics could argue that its brain expired a while ago. Now other players are lining up to perform the final surgery to remove and distribute its organs. <\/p>\n
Telkom is dying from selfinflicted wounds caused by complacency in the past and lack of direction in the present. <\/p>\n
Its managers cannot be blamed in isolation as the government endorsed their complacency by failing to license any timely competition. <\/p>\n
The government’s heavy hand was also seen when former Telkom CEO Papi Molotsane took initiatives to reinvigorate the business, and was promptly axed. Such retribution no doubt instilled a sense of caution in the group, which no player in the fast-moving telecoms sector can afford to be saddled with. <\/p>\n
International experience has shown that fixed-line telecoms players must reinvent themselves to remain relevant, but Telkom was slow to react. When it finally saw the growth and profits from its fixed-line business taking strain, it began trying to restructure itself and define a future direction. <\/p>\n
Instead of doing anything decisive, it has floundered for months, juggling various strategies and seemingly dropping all the balls. Its tactic of announcing and assessing a variety of potential options yet failing to deliver on any of them has left Telkom vulnerable to external attacks from investors who believe they can do it better. And no doubt they can. <\/p>\n
A year ago, CEO Reuben September outlined a three pronged strategy of expanding into Africa, offering combined bundles of voice, data and internet services, and entering the television arena through a new venture, Telkom Media. Those goals have largely failed. <\/p>\n
It is already pulling out of Telkom Media, saying the planned investment would soak up too much money that could be used more profitably elsewhere. Instead of pumping R7,5bn into the highly speculative field of pay-TV, Telkom would be better off investing heavily in boosting its voice and data networks, the group said. <\/p>\n
Telkom might also decide to buy into a foreign cellular operator, it said, almost as an after thought. Yet its plans to move into Africa have proved both slow and difficult. <\/p>\n
The third goal of bundling voice, data and internet services together has also had little effect, and has been thwarted by the failure of its efforts to acquire hi-tech partners to help deliver those offerings. <\/p>\n
Telkom’s lack of direction was highlighted afresh last week when the Solidarity union warned it would take action if the company went ahead with a plan to outsource much of its core operations. <\/p>\n
Solidarity feared that up to 19000 of the 26000 staff could be affected if Telkom outsourced the running of its networking facilities and Telkom Direct shops as part of a restructuring process. <\/p>\n
So, one minute Telkom wants to expand and acquire hi-tech companies to broaden its services, and at the same time it is debating outsourcing its operations. <\/p>\n
But its most abject failure has been an inability to sell its 50% stake in Vodacom to the other 50% shareholder, Vodafone, despite both Vodacom and Vodafone urging it to do so. <\/p>\n
Negotiations fell to pieces last year when Telkom linked the deal to a simultaneous attempt to sell its fixed-line assets to MTN. The theory was that Telkom needed a cellular partner so it could offer both fixed and mobile services. It would not sell Vodacom unless it had a relationship with MTN sewn up. <\/p>\n
And when no agreement could be reached with MTN — apparently because Telkom did not meet the high standards that MTN sets for any acquisition — then the very sensible step of selling Vodacom to Vodafone was shelved as well. <\/p>\n
That fiasco confirmed how short-sighted Telkom can be. The smart move would have been to sell Vodacom first, leaving itself free to negotiate deals with various other cellular operators. That could have helped it move up into Africa too, by striking deals to offer combined services with operators beyond SA’s borders. <\/p>\n
Telkom recently rejected an investment proposition by Saudi operator Oger Telecoms. September said the offer was declined as it was not in the interests of its shareholders. <\/p>\n
News that the deal was off triggered a 10% dive in its share price. That was probably not because investors think selling Telkom to a foreigner would be wise, but because faith has dwindled in the ability of the current leaders to keep Telkom ticking. At the moment, it seems anyone with the money and the guts to take over will be welcomed with open arms. <\/p>\n
Little is known so far about the two new deals Telkom is debating. What is obvious is that they fit together nicely. <\/p>\n
Vodafone has made a renewed bid for some of Telkom’s shares in Vodacom, and is understood to be chasing 12,5%. The deal depends on Telkom unbundling the rest of its 50% stake to Telkom shareholders. Since the government owns 38% of Telkom it would receive some of those shares, so Vodafone needs a large enough stake to call the shots without risking any interference in its policies from the government. <\/p>\n
The second bid comes from local black investment house Mvelaphanda, which wants to buy out Telkom but without the Vodacom assets. A deal will only firm up if Telkom agrees to shed its Vodacom shares. <\/p>\n
Mvela is led by businessman and political stalwart Tokyo Sexwale. For this deal, Mvela has teamed up with New York listed Och-Ziff Capital Management, already its partner in African Global Capital, formed to invest in mining and energy assets. <\/p>\n
“The deals will happen,” one analyst said, but the financial terms will take some thrashing out. He believes Telkom’s 50% stake in Vodacom is worth R60bn, but Telkom could probably raise R65m if it sold 12,5% to Vodafone at a premium. <\/p>\n
That means Telkom’s market capitalisation of R80bn values its fixed-line assets at only R15bn, although they will make a pretax profit of about R12,5bn this year. Mvela has reportedly bid R90bn for those assets, or R172,80 a share, yet Citigroup believes R180-R185 to be fairer. <\/p>\n
Either way, the current share price of R150 shows investors are aware of the risks and challenges facing the potential deals. The government owns 38% of Telkom, and will not want the fixed-line operations to go to someone with no understanding of the business, the analyst says. It may also be unhappy to see Vodafone controlling Vodacom. What plays in favour of the deals is that Telkom can no longer carry on alone.<\/p>\n