The Department of Communications (DOC) has seen its stake in Telkom eroded by R637.8 million since news emerged that Cabinet was not going to support a tie-up between the operator and Korea-based KT Corporation.
In addition, as Telkom did not declare a dividend for the year to March, because it now needs to internally fund part of its R18 billion to R21 billion capital plan, the department will lose out on its expected R315 million in revenue for the 2012/13 financial year.
The state's new financial year kicked off in April and the DOC anticipated total revenue of R2.4 billion, according to Treasury's latest National Estimates of Expenditure. Of this, about 13% would have come from Telkom dividends; money that will now have to be sourced elsewhere.
On 1 June, news emerged that Cabinet would not support KT's proposed acquisition of 20% of Telkom for a lower price of R25.60 for every new share. The parties were discussing a share price of R36.06 last October.
Shortly after news that the deal was off was made public, through a Telkom statement, shares in the company started losing ground. After the operator reported its results last Friday and said it was not declaring a dividend, its stock fell further.
Value slump
Yesterday, the share price closed at R19.72, compared with its 1 June opening price of R22.80. Based on its last annual report, Telkom has 520.8 million shares in issue and government owns 39.76% of these.
Telkom, which is creaking under a debt burden and a huge capital plan, had no choice but to suspend its dividend as it needs the capital for investments in its network, notes Naryskine. The KT deal would have provided Telkom with capital of about R3 billion, as well as injecting skills and expertise.
Telkom generated R10 billion in the year to March, but has R3.9 billion in net debt, while its total borrowings are R7.1 billion, according to its results booklet.
Alternatives
Telkom did not declare a dividend for the financial year to March. It said although its current financial position should allow it to fund network transformation and its data-driven mobile offering, the board determined it is prudent to allow for more internally-generated funding for the capital expenditures planned over the next three years.
The operator will invest between R18 billion and R21 billion in its network within the next three years, focusing on data, broadband and fixed-to-mobile convergence. It says internal funding should better position it to “weather uncertainties as we advance our value-building strategy”.
Telkom, which would have gained just more than R3 billion from selling a 20% stake, will fund its expansion through cash flow and debt. CFO Jacques Schindehutte has said, while the amount it would have earned is the right number Telkom needs, it will look at alternatives. “[The] KT deal would have improved the company's prospects in a material way.”
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, says Schindehutte. He notes the group can increase its gearing, but is more likely to roll over debt once it matures.
Funding questions
Richard Hurst, Ovum's emerging markets analyst, says Telkom's suspension of its dividends to have cash for its expansion programme is “almost like a matter of survival”. He says Treasury will have to find revenue of R315 million, but the question is where.
Telkom's suspension of its dividends does not bode well for investors, either institutional or private, says Hurst. DOC earned about R300 million in the 2011/12 financial year.
Hurst says Telkom may have to go “cap in hand” to government for more funding and Treasury will also have to find DOC's shortfall. This could either be from taxes or a “case of taking from Peter to pay Paul”, he says.
The DOC did not respond to a request for comment.
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