Telkom faces major revenue blow

As the deadline for Telkom's exit from Vodacom looms, the fixed-line operator faces the prospect of losing more than 40% of its annual revenue, which could put the once-monopolistic operator under serious pressure.

According to a statement released earlier this week, Telkom's sale of its 50% Vodacom share will be completed by 4 May, and the country's biggest mobile operator plans to list on the Johannesburg Securities Exchange the following day.

This will see the end of a joint 50:50 shareholding in Vodacom by Telkom and UK-based telecommunications giant Vodafone. The R22.5 billion deal will see Vodafone take an additional stake in Vodacom, with the remainder of the stake being unbundled.

However, Telkom has been cagey about how it plans to offset its mobile revenue loss, as well as whether it has a concrete mobile strategy in place.

In its financial results for 2008, Telkom reported Vodacom accounted for 42.8% (R24 billion) of group operating revenue and 42.9% (R6.2 billion) of group operating profit. While the company admits it is facing challenging times, it is not revealing specific details on how these income losses will be mitigated.

In effect, Telkom claims it is looking to diversify its revenue streams, as well as product and service offerings in existing and new markets.

The group yesterday reiterated one of its “core strategic focal areas” is its “defend and grow” strategy, which aims to protect its “current business and contain the loss of market share in an increasingly competitive and changing regulatory landscape”.

“In addition, Telkom recently announced a new organisational structure, which aims to support and enable the company's future strategic direction. Part of the rationale behind the new structure is to bring a massive focus to broadband,” it says in a statement.

It adds that, in the past, Telkom had communicated the target of 20% of fixed-line telephones in service to be broadband-enabled by 2011. However, going forward, this figure could be revised upwards.

“Telkom will also achieve a greater broadband penetration by expanding our mobile 3G broadband network.

“Growth and expansion, including outside of SA's borders, is another pillar in Telkom's future strategic focus. The company's recent corporate actions - such as the Vodacom-Vodafone deal, our 100% acquisition of MultiLinks (a Nigerian-based wireless network), Africa Online (which gives Telkom a widespread East African footprint) and the acquisitions of the African operations of MWeb, clearly reflect Telkom's intent.”

Yet, the operator has not communicated any of its plans for a mobile roll-out, bar a few comments made by CEO Reuben September on the sidelines of last year's financial results presentation.

September explained that Telkom plans to become SA's fifth cellular provider by the middle of this year, and was preparing to enter into talks with an existing mobile operator to roam on its network.

The mobile plan, he said, would involve a strategy of “selective build” to add mobile capability to its existing infrastructure, rather than build and operate its own mobile network.

To date, however, the company has not revealed whether it has actually entered into talks with any local or foreign mobile providers, or how advanced these negotiations might be.

Several analysts agree Telkom's exit from Vodacom would cause a revenue blow that would be hard for the fixed-line operator to absorb.

Dobek Pater, a managing member of the Africa Analysis team, opines that Telkom could well have held off on the sale of Vodacom until it had found a suitable replacement revenue stream. “It took a little gamble letting go of Vodacom now,” he explains.

However, he says Telkom's African investments may well carry it through the tough times ahead. The company has a stake in Nigeria's MultiLinks. In terms of African voice and data, Nigeria represents a larger market than SA - a no-brainer investment for a company like Telkom.

But Pater also notes that, despite its African presence, or perhaps because of it, Telkom would need to have a mobile strategy. While the company is currently going it alone with its wireless solution, which it claims has seen good uptake, Pater notes that Telkom lacks the in-house expertise in mobile. Despite having grown some in-house mobile competencies through its investment in Nigeria, Pater believes the company would need much more.

He says Telkom should find a mobile partner, perhaps Orange or Zain - two mobile businesses competing aggressively against each other and in roughly the same markets as Telkom.

“Cell C will not be an option for Telkom, because of the massive debt they have.” Pater says Telkom will need to find a few new acquisitions to consolidate its place in the African market. “At the moment it's a little rough around the edges,” he notes.

It took a little gamble letting go of Vodacom now.

Dobek Pater, managing member, Africa Analysis

Denis Smit, MD of research firm BMI-TechKnowledge, says Telkom's real hope lies in its plans to outsource roughly 90% of its operations.

Telkom has plans to restructure its operations and management structures, which the unions have been blocking since the middle of last year. Telkom's restructuring plans are an attempt to streamline the behemoth, a similar plan that several international telecommunications businesses have successfully followed through with.

Smit says Telkom has the right idea in terms of outsourcing, but adds that it will have a serious problem if the unions effectively block the process. “They need to do this in order to stay competitive and follow international best practice.”

Related stories:

National fibre caught in love triangle

Vodacom makes its investment mark

Vodacom's walk to freedom