Telkom's new clothes

The Emperor's New Clotheswas never my favourite story as a child. That the grand monarch saw a magnificent robe, when actually he was prancing around in his birthday suit, confused me.

As I got older though, the story's premise began to shine true in the actions of general society. People are happy to find fault where there is none, or only try to understand what they want to.

Listening to questions posed to Telkom's executive team yesterday, at its interim results, the story became even clearer. Every bad figure presented by the company's financial director, Peter Nelson, was queried by the audience in light of the Vodacom sale. In fact, every good figure was also attributed to it.

I couldn't help but wonder if we were not looking for something that simply wasn't there - the gaping hole left in Telkom's financials by the sale of Vodacom.

There are a great many people saying Telkom is now “naked without Vodacom”, which - while it rings true off the cuff - doesn't quite hold up against research.

Telkom's sale of Vodacom happened at the right time, in the right climate and with the right path for Telkom in mind. Selling the mobile operator has perhaps dented Telkom's revenue, but it has also relieved Telkom's costs.

What we have to remember is that Telkom is no more or less Telkom without Vodacom; it should simply be considered a smaller business, with smaller profits and losses.

If Telkom tried to sell that 15% stake in Vodacom now, it would not even come close to the premium it received for it.

Candice Jones, telecoms editor, ITWeb

If Telkom tried to sell that 15% stake in Vodacom now, it would not even come close to the premium it received for it.

Simply take a look at what the company made off the sale - Telkom sold the 15% at R22.5 billion. Vodacom's current market capitalisation is now sitting on R87.26 billion (around R13 billion for 15%), meaning Telkom shareholders pocketed roughly R8 billion more than it's actually worth.

Also, Telkom is free to compete in mobile under its own power, sans strange shareholder agreements and a subsidiary cannibalising its own subscribers.

Telkom has a lot to do in terms of becoming the giant it was in its heyday, but most of the trouble has very little to do with Vodacom. The company's first and likely biggest problem is Multi-Links, its Nigerian subsidiary.

Many headlines yesterday were quick to point out that shareholders were unhappy with the results and the company's share price plummeted 1.4% on the day. While there are many statements about why the company's price took a dive, I am inclined to believe the shareholders were a little grumpy about Telkom's R2.14 billion impairment of Multi-Links.

But the hyped stories around the toll that Multi-Links took on Telkom's results also need to be viewed in context. The current African climate is seeing a multitude of acquisitions becoming far more expensive than they would have been last year.

Vodacom had to impair its Gateway acquisition by R3.2 billion. Following which, Vodacom's share price plunged from R56.15, to R51.55 in the month after the announcement. The company also produced slowing growth figures in its results, and speculation is that there is little growth opportunity left for it.

Yesterday, Telkom was also lambasted for its bleeding fixed-line customer base, which admittedly isn't a pretty sight, but is inevitable.

Globally, fixed-line operators are losing subscribers left, right and centre. Most people under the age of 20 don't know what a fixed-line voice service even looks like. Almost everyone has a cellphone in hand and it's not a surprise that Telkom's fixed-line revenue is dwindling.

But the company has also been long in preparation for the shift to mobile. While it had Vodacom in hand, it couldn't really say as much, thanks to Vodafone's hold over the mobile space. But it has been implementing fixed-mobile services around the country over the last five years, which can be switched to full mobility and will be before the World Cup.

Almost in the same pen stroke on the Vodacom sale agreement, Telkom announced its own mobile service. So why are we so hung up about a future strategy for Telkom? It has already explained its service, a million times.

As for the dwindling supply of fixed-line customers, MTN has seen its mobile subscriber growth reverse too. In its results presentation in August, it announced its South African operation had come to a growth standstill.

MTN's share price went from R132 to R122.15 in the month, after its disappointing South African results.

Telkom's results may have not been as sterling as many had hoped for, but they certainly were not missing Vodacom.

It is very easy to look for what we want to find in the company's results and it's very easy to forget that all the telcos are in the same boat. Telkom's turnaround will be a process; it is not a schooner, but a liner, and it will have to traverse the storm, before it can see the sun.

Yes, Telkom is naked, but that doesn't mean we should be looking for its 'new clothes'.