Analysts caution potential Telkom investors of pitfalls ahead
Although Telkom has high-value assets, any potential investor in the telephony group should be cognisant of the risks associated with attempting to turn its fortunes around.
This is the word from telecoms industry pundits, commenting on the potential takeover of Telkom, which has sparked industry-wide interest.
The telephony group is looking to sell off part of its assets amid a difficult operating environment, evolving technological advancements and accelerated power outages.
In its latest results released last month, Telkom group CEO Serame Taukobong noted the company continues with its “value unlock strategy” – where it is looking for partners to support its requirements for scale across its subsidiaries. This would enable the state-controlled organisation to compete more effectively in the market, he stated.
According to analysts, while Telkom’s assets remain valuable – due to its extensive infrastructure, data centres and customer base – those looking to invest in the telco should not ignore potential pitfalls.
Peter Takaendesa, head of equities at Mergence Investment Managers, cautions: “We believe Telkom continues to have significant value hidden in its assets and this value can be realised if execution on the value unlock plans or strategies is timely and effective.
“However, any interested potential suitors for Telkom are unlikely to offer full valuation for the assets, given the high execution risk in turning around Telkom’s operational performance. Those risks include the additional investment that may be required to sustainably turn around Telkom’s investment case, and potential for stronger competition in the key growth areas of fibre and mobile data.”
According to Takaendesa, fixing some of the structural issues at Telkom likely requires acquirers to have significant control of the group, to unlock any value that may be hidden in the group at the moment.
Over the last few years, interest in SA’s third-biggest mobile operator gathered momentum, with several industry suiters coming forward with offers.
Last month, Telkom rejected a bid for a controlling stake in the company from a consortium led by its former group CEO Sipho Maseko. In January, Telkom and Rain terminated discussions relating to Rain’s proposal to merge with the majority state-owned telephony group.
Last year, MTN, Africa’s biggest mobile operator, also made moves to buy Telkom. However, MTN walked away from the deal after the telephony group failed to provide it with assurances around exclusivity.
In its latest results, the group’s EBITDA declined by 4.2% to R2.2 billion, impacted by legacy and fixed voice revenue declines.
Despite this, communications and digital technologies minister Mondli Gungubele last month reaffirmed government’s stance of being unwilling to sell its Telkom stake.
Government owns 40.51% in its own name, and the Public Investment Corporation, the asset management company for the Government Employee Pension Fund, owns 13.6%. This effectively means government owns a stake of 54.11%.
Discussing risks faced by potential Telkom investors, Thecla Mbongue, senior research analyst at research firm Omdia, comments: “Shares in the telecoms or ICT industry are strong and valuable assets to hold on to.
“One of the main challenges is that Telkom’s segment [telecoms] requires continuous investment in order to keep the networks up and running, but also to upgrade and expand the networks and implement innovative service. At the same time, in South Africa, expenses related to power supply have increased due to the current energy crisis leading to regular power outages.”
Mbongue believes government made the right decision to hold onto its shares, as beyond the services offered, telecoms infrastructure is key strategic infrastructure, which most governments usually prefer to hold onto.
Earlier this year, Telkom revealed it planned an asset write-down of R13 billion, through the planned impairment of its businesses Openserve, Telkom Consumer, Gyro and BCX.
The company says it is currently engaging potential partners that have indicated interest in some of its subsidiaries.
During last month’s media briefing in Centurion, Telkom Group chairman Geoffrey Qhena discussed the criteria of an ideal shareholder. He noted the telco would be willing to consider a partner that shares government’s interest in harvesting Telkom’s infrastructure to connect the country, among other qualities.
“When we look at the offers we receive, if we feel, as a board, that this will not be to the benefit of our shareholders, then we will not accept it. We know what the value of Telkom is and there is a lot of potential in the role Telkom can play in ensuring South Africans benefit from this relationship we have with government,” Qhena commented at the time.
Derrick Chikanga, research manager for IT services at IDC, believes selling stakes across its subsidiaries could be a good starting point for Telkom, given that government is not willing to dispose of its shares.
“Telkom has been struggling for a while and some key reforms that include significant cost-cutting will need to be implemented to make the company profitable.
“It could take a gradual approach to disposing of its shareholding, while gauging the company’s financial performance during each disposal phase. Eventually, what will be critical is for it to raise enough cash from its disposal to invest in key aspects of its business, which include network infrastructure, increasing network coverage and quality, and attracting more customers to its network,” he points out.
According to Chikanga, the group could leverage global network providers by selling its assets to them.
“Global players could potentially have the capabilities to implement the reforms to turn around the fortunes of the company. The relevant skills and expertise of such global players will be critical in implementing new ideas to make Telkom’s operations viable,” he asserts.
However, Mbongue is of the view that global partners should stand as much chance as local ones. “What is important is the potential investor’s track record within the industry or, if they use Telkom as a means to enter the ICT sector, its financial backing would weigh more.”
Takaendesa warns against waiting too long to identify potential investors. “Our view remains that the longer Telkom delays its value unlock strategy, the more any value currently left in the business will be destroyed permanently, as the market keeps changing, with new competitors coming up and ongoing structural issues impairing the balance sheet.”