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KT deal could resuscitate Telkom


Johannesburg, 14 Oct 2011

Fixed-line operator Telkom is in talks with KT Corporation, which may see the JSE-listed company sell a 20% stake to the Korean company, which could dilute government's 38% stake, freeing it up to be more competitive.

Telkom's market capitalisation is currently R16.7 billion, potentially valuing the deal at more than R3 billion. However, Telkom says it will issue more shares to KT should the deal go through, which will dilute government's current stake.

Government's 38% shareholding has long been a bone of contention as the state has been accused of interfering with Telkom's strategy, which analysts have argued drove away key talent such as former CFO Peter Nelson. Solidarity has also called for government to sell out of Telkom, accusing it of making political appointments.

This morning, Telkom said it was in talks with KT Corporation - formerly Korea Telecom - that could see the South Korean operator take up a 20% stake in SA's dominant fixed-line operator.

Telkom said the companies were in talks around a “potential strategic venture” that could lead to a long-term agreement to “formalise the relationship and identified areas of mutual strategic and business cooperation”.

Competitive edge?

KT Corporation was founded in 1981 and became a “government-funded” corporation in 1997. It was privatised in 2002. In the past 12 years, it has increased the number of lines from 4.5 million to 20 million, making telephony a universal service.

Telkom, which was privatised in 1991, currently has an installed base of about 4.3 million lines. However, the company is facing dwindling voice revenue, increasing competition and pricing pressure.

CEO Nombulelo 'Pinky' Moholi has previously said the company has “neither the agility to seize market opportunities, nor the ability to absorb competitive pressures ad infinitum”. She said a “step change” in the way it invests and operates is vital.

Telkom needs to become more agile in order to become more resilient, said Moholi, speaking at the company's year-end results presentation in June. It needs the right business structures to “spot and execute quickly on revenue and cost opportunities”.

“We need to identify the most important elements of our business in terms of profitability and growth, and equip these areas with financial resources and our best skills,” says the operator.

However, it says this process will “take time” and careful capital investments.

“We have to capitalise on Telkom's strengths, including the network and relationships with business, to provide higher speeds and end-to-end reliability that cannot be matched by our competitors.”

Telkom says if the deal goes through, it will issue more shares at R36.06, which is a premium to the R32.15 its share was trading at just after it issued the statement. By mid-morning, its shares had shot up 6.07% - or 195c - to R34.10.

Fresh blood

Analysts say the deal will give Telkom access to intellectual property and will strengthen its balance sheet.

Strategy Worx MD Steven Ambrose notes that KT will inject fresh ideas into Telkom and provide it with the impetus to innovate. Telkom has been accused of lagging behind the times and failing to introduce exciting new products. It has also been blamed for stifling broadband innovation.

Ambrose adds government's share in Telkom will be diluted unless it issues a new class of shares. However, he does not anticipate KT being a quiet investor, even though it will have a minority stake.

Should government have less control over the operator, Telkom's nature could change as it would become more service-orientated and innovative, notes Ambrose. He says this would be good news for consumers.

Without government interference, Telkom has a better chance of competing in a fluid market, Ambrose adds.

BMI-Techknowledge MD Denis Smit says KT's intellectual property, network expertise and multimedia content management is of interest to Telkom. However, he is not sure what KT will get out of the deal.

Smit says Telkom's share price is tracking lower than what it was 18 months ago and, as the rand is also weaker than it was a few months ago, the share is a “cheap buy”.

KT's investment in Telkom will strengthen the fixed-line operator's balance sheet, Smit adds. He says KT could be interested in using Telkom as a springboard into Africa.

The Department of Communications referred all queries to Telkom, which would not comment outside of the official statement. The company is currently in a closed period.

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