Telkom`s new beginning

The partial listing of state-owned telecommunications utility Telkom has been criticised as an opportunity lost for government, but the experience of past privatisation exercises proves that prudence is the better option.

Ironically, the country`s first state-owned asset to privatise and list on the JSE, Iscor, is going through a shareholder struggle of its own as Indian iron and steel group LMN battles minorities to up its stake from 35% to 47%.

The SA iron and steel manufacturer was listed in 1989 to great acclaim following a media blitz advertising the share issue second to none. However, it was left essentially without a majority shareholder for more than 10 years, leaving management with no one big enough to swing a whip should performance not be up to expectations. Management embarked unhindered on several large and expansive projects, such as the Saldanha Steel plant, termed the most expensive job-creation project in SA history.

However, Iscor had one undeniable asset: its dominance of the local iron and steel market was so great that it amounted to protectionism. This allowed it to use profits from its SA sales to cut the price of its exports. During the mid-1990s it was a well-known fact that it was cheaper to import steel from China that had been produced in this country, rather than buy it directly from Iscor.

An important shareholder lesson that Iscor learnt was that it is an expensive exercise to service hundreds of thousands of individual investors, and this prompted a share consolidation in 1999 that substantially reduced the number of shareholders. This will have to be remembered by government and Telkom`s other major shareholders.

A major difference between the Iscor listing and Telkom`s is the state of the nation. When Iscor was privatised, SA was an isolated country and the government of the time had little or no access to foreign funds. At the same time it was heavily committed to several large-scale projects, such as the Lesotho Highlands Water Project to supply water to the Vaal Triangle industrial region, the Mossgas liquefied petroleum gas project and the expense of sustaining what was in effect a police state.

Parliament oversight at the time was marginal at best and this meant Iscor and its management could get away with almost whatever they pleased.

Business will also have to rise to the challenge and bring a viable SNO proposal to the table for the telecommunications sector to become really competitive.

Paul Vecchiatto, Managing Editor, ZAFinance

Telkom`s listing is a different matter entirely. Firstly, the group has been turned around from an expensive resource-consuming parastatal to one that is generating cash. Secondly, its listing occurs with the advent of a second fixed-line national operator (SNO) and so competition will appear quite early in its privatised life.

Thirdly, Parliament is in a position today to play a much stronger oversight role. The Portfolio Committee on Communications is willing and able to fulfil its function. There is also the Independent Communications Authority of SA (ICASA) that has demonstrated its willingness, if not its astuteness, in taking on the mantle of an industry regulator. Lastly, the issue of corporate governance has grown large on the radar screens of all investors and Telkom`s management has to meet this head on, especially as it is also listing in New York.

But Telkom`s listing will also face new challenges. While political opposition has generally been muted or marginalised at best, opposition parties and those allied to the ruling African National Congress will be watching the group`s behaviour closely and this will create a number of strange bedfellows.

For instance, the ultra-left, in the form of the SA Communist Party, was bizarrely supportive of an attempt by the trade union Solidarity (which grew out of the previously all white mine workers` unions that benefited under apartheid) to have the share issue stopped because it favoured only black people and would not help the poor in general. In a controversial deal, government dropped the colour requirement and Solidarity withdrew the court challenge.

On the commercial front, Telkom will have to keep a wary eye for just who gets the once coveted SNO licence. The two contenders, Goldleaf and Optis, have been slammed by consultants Next Generation. And the three bodies that will have stakes in the SNO, Eskom Enterprises, Transtel and Nexus, have called for ICASA to reject both bids. The longer this process goes on, the longer Telkom will stay dominant by default.

While it has been argued that government would have received a much better deal if it had listed Telkom two years ago, the fact is that should the share price have fallen, investors would have felt bitter and ripped off. Rather, it now seems that the shares should be more realistically priced and this will allow investors to benefit on the upside should the telecommunications industry go through another growth phase.

The big question is, will government list further tranches of Telkom? Government has still not made its intentions clear about how much of Telkom it actually wants to flog.

The present listing is only for about a third of the equity and while it is not known what this is worth, some say about R6 billion would be right. Should this be so, it is only half of the amount that finance minister Trevor Manuel has indicated would be raised from privatisation proceeds this year. There is little else ready for privatisation this year, so there is a possibility that a further tranche of Telkom shares may be issued later this year, depending on how well the first is received.

Either by design or by accident, Telkom`s listing will go off smoothly, but government will have to become a lot more transparent in its strategy in terms of future listings and the growth strategy for the group. However, business will also have to rise to the challenge and bring a viable SNO proposal to the table for the telecommunications sector to become really competitive.

Telkom`s listing brings to an end an important era in the company`s history. But the challenges that lie ahead are far greater as it will eventually have to cope with competition and free-market forces.