Telkom's other options

By Nicola Mawson for Telkom
Johannesburg, 01 Dec 2006

Telkom's bid to take over Business Connexion (BCX) could be thwarted if the IT services firm's board does not agree to extend the deadline for the R2.4 billion deal.

Media reports indicate the company's shareholders, who have until 14 December to decide whether to proceed with the deal, will collect further information with which to make their decision.

BCX CEO Peter Watt is reported to have said that, despite the prolonged deal impacting negatively on earnings, shareholders did not vote to kill the merger at yesterday's annual general meeting.

An analyst says BCX may not agree to extend the deadline set in the scheme of arrangements. If Telkom chose to carry on with the deal, this would result in it becoming a hostile bid, he says.

Telkom's other alternatives include looking at another company to take over, or building up its own IT services division organically.

The analyst says GijimaAst might make sense for Telkom as a takeover target. In addition, Bytes Technology Group might wait in the wings for the deal to fall through, and make its own move on BCX as it has already indicated it is keen to take over BCX, he adds.

Sensitive issue

Telkom previously indicated it would pursue the merger and expects hearings to take place in March.

Lulu Letlape, Telkom's group executive for corporate communication, last month said it "continues to believe it has a strong case, and will put forward its case to the Competition Tribunal".

However, at the company's recent interim results, CEO Papi Molotsane indicated the company could look at buying a number of smaller companies and combining them.

Alternatively, it could form a relationship with an international firm that wishes to entrench its position here. In addition, he said Telkom could build up this capacity on its own.

Irnest Kaplan, MD of Kaplan Equity Analysts, says an option that seems most likely and easiest to implement is for it to form a joint venture with an international company that wanted a South African presence.

Bottom line pain

BCX is already feeling the pain of the dragged out deal. The analyst says clients are wary of signing long-term contracts due to uncertainties over ownership, and the company is losing staff.

Kaplan says buying out an IT services company would allow it to move up the value chain and retain customers as the telecoms sector becomes more competitive.

However, BCX is one-tenth of Telkom's size on a revenue basis, and its purchase price is less than 10% of what Telkom will spend on infrastructure up to 2010.

As a result, the consequences for Telkom, if the bid fails, are not as severe as they will be for BCX and competition in the sector if it is successful, he notes. Kaplan does not see the deal proceeding as it will "change the landscape of IT services" in SA.

In November, the Competition Commission recommended the tribunal not allow the deal to go through, citing competitive concerns. It is still unclear when the tribunal will wrap up its hearings.

Market consensus is that nothing will be wrapped up before the end of the first quarter of 2007, which would mean the deal has been going on for about a year.