Telkom determined to execute growth plan

Telkom is contemplating the need for a “plan B”, or “plan C”, after government canned a proposed deal between it and KT Corporation, that would have seen the Korea-based group inject skills and needed capital.

Telkom, which faces more risks in the implementation of its strategy than it would have if the deal had gone ahead, has suspended its dividend so that it has more cash available to spend on its network rollout. The group expects to invest between R18 billion and R21 billion in the next three years.

The operator faces dwindling fixed-line penetration and falling voice revenue. In the year to March, it reported headline earnings down a third to R1.658 billion, but its after-tax profit on continuing operations was 93% lower, at R179 million. It slumped to a R90 million net loss, after taking into account discontinued investments, which lost R269 million.

Just over a week ago, Cabinet binned a proposed deal between Telkom and KT, which would have seen Telkom issue 20% more shares to gain about R3.3 billion - around a 10th of its annual revenue. It and the Department of Communications (DOC) are set to meet to discuss more options, and communications minister Dina Pule has about three months to report back to Cabinet on proposed ways forward.

CEO Nombulelo “Pinky” Moholi says Telkom's biggest issue at the moment is credibility, as past management has not delivered on its promises. She says a strategic equity partner would have provided Telkom with input in areas where it does not have capacity and offered opportunities for growth.

The DOC said in a statement that “government recognises the need for Telkom to implement an urgent turnaround strategy, and to get the company back on its critical centre of delivering ICT services to all South Africans”.

Moholi says Telkom is determined to look at different ways to achieve the same opportunities for growth. She says the company is determined to earn back its credibility.

Telkom has unveiled a strategy that includes leading in data, broadband and fixed-mobile convergence, growing Telkom Business's income through diversification, regaining competitiveness in the consumer market, consolidating its position as a wholesaler of choice, focusing on profitable market segments and services, and enhancing its operational efficiency.

Telkom hopes the strategy it has communicated is clear, says Moholi. She adds that it is “not in the air”, and is practical as it plays on the group's competencies.

In the areas where Telkom does not have the necessary skills, the group has been transparent in indicating it needs to buy these competencies as it cannot start a unit from scratch, notes Moholi. “We don't have the luxury of mistakes anymore.”

Telkom will look at a “plan B”, or “plan C”, in the short- to medium-term to “concretise its options”. At the moment, she adds, it is still “fresh news” for Telkom, and the group needs to engage with government to understand the context and clarify the next steps.

Telkom needs to come up with solutions focused on the positives, says Moholi. The group's strategy and vision are “sound”, but the executive risk may be higher without a skills injection from a partner like KT, and a capital injection is always “welcome”.

CFO Jacques Schindehutte says the “KT deal would have improved the company's prospects in a material way”. However, he says there is no need to panic, as its strategy is sound.

Telkom will need to invest between R18 billion and R21 billion into its network within the next three years. The company said its investments would focus on data, broadband and fixed-to-mobile convergence.

Telkom, which would have gained just more than R3 billion from selling a 20% stake, will fund its expansion through cash flow and debt. Schindehutte says, while the amount it would have earned is the right number Telkom needs, the company will now look at alternatives.

The capital injection would have made it easier for Telkom to raise capital from the markets and, while its strategy remains, the margin for error is smaller. Schindehutte says Telkom is cash-generative - having generated R10 billion in the year to March.

Telkom has R4.9 billion in net debt, while its total borrowings are R8.4 billion. Schindehutte says the group can increase its gearing, but is more likely to roll over debt once it matures.

The operator suspended dividend payouts to allow for internally-generated funding for its capital plans. It says dividends will be considered on an annual basis, based on the performance of the group.

Schindehutte notes that if the KT deal had taken place, discussions around the dividend would not be occurring. Telkom made a “small profit,” and is mostly at break even, he adds.

Solidarity spokesman Marius Croucamp says the collapse of the deal was a “big surprise” and is a fiasco, as it would have injected new technology, training and management focus to take Telkom forward. He says Telkom's future is now “uncertain”.

Croucamp says there are “23 000 people out there whose jobs are in danger” and the union is expecting job losses as a result of the deal being binned. KT would have been a saviour for Telkom, he adds.

Schindehutte said on Friday that Telkom has 15 months in which to show progress in revenue growth, or face significant cost interventions. He said the company is working with unions to retrain staff and management, and employees must lift their game to ensure return on investment.

South African Communications Union president Michael Hare says a successful KT transaction or an international partner was pivotal for Telkom's modernisation of its legacy network.

Hare says the deal would have provided much-needed international expertise to roll out a modern network as well as provide inventive methods of improving the continuous decline in fixed-line revenue.

“The SA government's decision may result in Telkom becoming another utility (Eskom). It is therefore not unthinkable that Telkom may in the distant future request a financial bailout from government to remain sustainable.”