Don`t write Telkom off

By Iain Scott for Telkom

Johannesburg, 29 Nov 2007

Analysts are still positive about the value of Telkom`s share, after about R9.31 billion was wiped off the market capitalisation yesterday.

This came as the market reacted to the telecoms group`s failure to cement a deal with cellular operator MTN, which involved combining "certain or all" of Telkom`s fixed-line business with MTN.

Dealers say the market was surprised that Telkom`s talks with UK-headquartered cellular operator Vodafone, about Telkom`s stake in Vodacom, had been subject to an agreement with MTN and thus were also called off.

Vodafone had previously expressed its interest in acquiring more of Vodacom, which it now shares equally with Telkom.

While Telkom`s share price plunged R17.53, or 10.9%, to close at R143.92, MTN gained R9.20, or 7.7%, to R129.50. This gave MTN Group a market capitalisation of R241.24 billion, compared with Telkom`s R76.72 million.

A dealer says investors are now buying into MTN after selling Telkom shares, as many had gone long on Telkom and short on MTN.

Survival

However, analysts say there is still value in the Telkom share and that Telkom`s survival does not depend on a deal with MTN.

"At the end of the day, it probably would have worked both ways," an analyst says.

"In telcos internationally there is a trend towards providing a telecommunications service to people wherever they are, and the distinction between fixed-line and mobile is blurring. In five years` time, they will just be telcos. MTN down the track will have to have some fixed-line in some of its markets. Telkom will need mobile in its markets."

However, he says, Telkom could carry on with the status quo. An equity stake in a mobile operator is not essential, as it could still sell Vodacom and enter into agreements with mobile operators, much as Virgin did with Cell C.

"There are still quite a few options available," he says.

Blow to shareholders

Another analyst says Telkom`s problem now is that owning only half of Vodacom and not controlling the operation means it is difficult for it to offer mobile solutions if Vodafone perceives that this would harm it. When it does want to do so, Vodafone puts a halt to it.

The analyst says Telkom does need a relationship with a mobile player if it wants to implement those solutions. "They will have to go back to the drawing board."

Although the termination of the talks is a blow to Telkom shareholders, he believes the market overreacted yesterday, as there is still value in the share, as indicated by the fact that Telkom`s share had gained 2.7% this morning to trade at R147.90.

MTN was up another R1.57, or 1.2%, at R131.07 this morning.

Says another analyst: "Telkom still offers a lot of value at these prices. The market seems to be writing the fixed-line business off, but in five years` time it is still going to be a dominant player."

He says when people download data at home they prefer fixed-line as mobile is often too slow and unreliable.

"People also forget that mobile is last-mile - it`s all still fixed-line."