Telkom deal collapse a blow to SA
Cabinet's refusal to allow Telkom to sell a 20% stake to KT Corporation is a blow to Telkom, broadband-hungry consumers, and the country as it sends a signal that SA is not open for business.
KT, which rolled out one of the deepest penetrations of consumer telecoms services globally, was expected to inject Telkom with innovative thinking and give it access to new technologies.
However, on Friday, Cabinet binned the proposed deal, which would have seen Telkom issue 20% more shares to gain about R3.3 billion - around a 10th of its annual revenue.
The market's disappointment with the news could be seen just after trade opened on the JSE. Shares in Telkom started falling just after 9am and ended the day 8.34% down - a 191c decline - at R21, a new eight-year low.
Telkom, which was privatised in 1991, currently has an installed base of about four million lines, a figure that has been falling for over a decade. It has been facing dwindling voice revenue, increasing competition and pricing pressure.
Last October, the fixed-line operator said it was in talks to sell 20% to KT, for R36.06 a share. The deal was widely expected to trim government's hold on the operator, as Telkom would have issued more stock.
[EMBEDDED]Earlier this month, the parties agreed to a revised price of R25.60. However, the bid needed approval from the state, as well as government pension fund, the Public Investment Corporation. Combined, these entities have majority ownership in Telkom.
On Friday, the Department of Communications (DOC) said “Telkom is a key and strategic asset” in its plan, in conjunction with the private sector, to roll out broadband to all by 2020. It says government has “adopted a policy position to beef up its infrastructure for the next seven years, particularly in rural areas”.
“Government recognises the need for Telkom to implement an urgent turnaround strategy, and to get the company back on its critical centre of delivering ICT services to all South Africans,” says the DOC.
The department adds that new options will be considered by Telkom and government. Cabinet wants minister Dina Pule to report back to it on all options in three months.
Telkom will engage with Pule to discuss Cabinet's decision, its implications and for clarity, as government initiated the concept of a tie up between KT and Telkom.
Democratic shadow minister of communications Marian Shinn says Cabinet must provide reasons for its decision. “Its silence on the decision will exacerbate speculation that it was informed by political expedience and the fact that it would have been politically too risky to approve any transaction which may have short-term negative effects, which could be unpopular among its labour union allies.”
Shinn says Telkom “desperately” needs a capital injection that can revitalise it, so it can play a productive role “in an increasingly dynamic market”. SA also needs foreign investment to boost economic growth, she adds.
Telkom CEO Nombulelo “Pinky” Moholi previously said it has “neither the agility to seize market opportunities, nor the ability to absorb competitive pressures ad infinitum”. She said a “step change” in the way it invests and operates is vital.
Telkom must become more agile and needs the right business structures to “spot and execute quickly on revenue and cost opportunities”, said Moholi.
Cabinet's rejection of KT's bid “indicates that our government doesn't have the stomach to make tough business decisions that are sometimes necessary for companies to regenerate themselves and become more competitive,” says Shinn.
Shinn says turning KT away will cause SA to slip further down the rankings of IT-empowered nations on the continent. The World Economic Forum's 2012 Global Information Technology Report ranks SA at 72 globally, she notes.
KT is “disappointed” that Cabinet does not support the bid as “it would have brought significant benefits to everyone”. It says it will continue to explore opportunities in SA and the region.
Arthur Goldstuck, MD of World Wide Worx, says government's decision indicates that the country is not open to business from foreign investors. Government has taken a decision that freezes out external involvement in the sector and is a sign that it wants to continue with the Telkom way, he says.
While Telkom has a large national infrastructure, great expertise and provides an almost unparalleled service to enterprises, it has not been able to bring these skills to bear in the consumer market, says Goldstuck. KT would have brought fresh thinking, innovation and expertise to Telkom, he says. “It is a heavy blow to Telkom.”
KT was founded in 1981 and became a “government-funded” corporation in 1997, before being privatised in 2002. In the past 12 years, it has increased the number of lines from 4.5 million to 20 million, making telephony a universal service.
Telkom is nowhere near being able to deliver government's universal access targets, notes Goldstuck. He says fixed-line penetration has been falling for 12 years, from 5.5 million in 2000, to four million.
Even with a small stake, KT would have been able to assist Telkom as its Korea rollout represents one of the deepest penetrations of consumer services in telecoms globally, says Goldstuck. A value cannot be placed on such expertise, he adds.
Richard Hurst, Ovum's emerging markets analyst, adds Telkom will now have to “stick to its knitting” and focus on bedding down its current initiatives and cannot afford any more “adventures”. Cabinet's decision indicates it is wary about foreign investment in telecoms infrastructure companies, he notes.
Hurst adds government has indicated that Telkom - and its stake in the company - must be protected at all costs the same way the National Party protected state assets in the 1980s. He says SA can kiss other foreign investment in telecoms infrastructure goodbye.