On the brink: Telkom is on its way down. (Photo: Gallo Images/Lefty Shivambu)
If you bought Telkom shares when the company listed in 2003, today the price is still the same.
It is inevitable that the future of the company is the subject of much speculation, with analysts wondering whether it will survive after yet another write-down earlier this month. A write-down is performed in accounting to reduce the value of an asset to offset a loss or expense.
“This is the second time they’ve done a write-down,” said Peter Takaendesa, a portfolio manager and head of equity at Mergence Investment Managers. “If they keep going down this path another large impairment will be due in the next few years, potentially even faster than it is taken for them to do the second impairment and they might not survive it.”
The first writedown was when Sipho Maseko took over the company in 2013. Basic earnings per share were hit by a R12 billion impairment charge on the carrying value of the group’s legacy assets, according to the integrated report for the year ended 31 March 2013.
The second write-down of R13 billion, announced earlier this month for the year ended March, caused Telkom’s stock to plummet by 30% in morning trade to levels even lower than those seen at the height of the Covid-19 pandemic which ravaged the economy.
Since reaching its all time high of R183 in October 2007, Telkom’s share price has gone down by more than 85% to its current level of R26.50 a share.
“The third write-down will come if they continue on this trajectory. Sometimes you deteriorate slowly, then you accelerate into problems at some stage because many things start to go wrong and accelerate the need for further impairment,” Takaendesa said.
He said the business has remained in structural decline, with the company getting impairments because it is not generating enough cash flows to support its book value. The book value is a measure of a business’s equity and the value of an asset as it appears on a balance sheet. In the case of a business, book value is usually calculated as part of a sale, investment decision or liquidation of the business.
“It means they need to change the trajectory they are on,” Takaendesa said. ”It’s clearly showing that the business is not sustainable, hence the two write-downs that they’ve had to go through”.
Takaendesa reckoned that had Telkom not had the attractive infrastructure assets it boasts, the stock price would have fallen more than 30% after the latest write-down.
“That’s what really is keeping some investors. It’s that the infrastructure assets that Telkom has that are still really worth much more to someone who can use them better than Telkom is using them,” he said.
Sell the whole thing
Telkom’s infrastructure, which includes its fibre and IT assets such as its data centres, would be very lucrative to any buyer seeking to acquire the company. For example, Telkom owns the largest fibre network in the country, which is operated by its fibre wholesale division Openserve. The company has 165 900km of fibre.
“You take those assets and you give them to a business that’s not in structural decline and in that way you can make more value out of them,” Takaendesa said.
“But now if those assets remain confined to businesses that are structurally challenged, then you won’t be able to maximise them, hence the share price being where it is. The market can see that you are not able to extract the most value out of your assets.”
In July last year, mobile phone operator MTN said it was in talks with Telkom to acquire the whole of the latter in a stock or cash-and-shares deal. But the deal collapsed over a flirtation between Telkom and Rain, a mobile communications company providing voice, messaging, data and converged services. Telkom shares have gone down 20% since then.
“The attempt to play one buyer off against the other damaged Telkom further,” said Arthur Goldstruck, of World Wide Worx.
“I wouldn’t be surprised if MTN re-enters the fray. I don’t think Telkom is offering itself on a plate just yet but it certainly becomes a more attractive acquisition target at a lower share price. In fact it’s almost a bargain basement price at the moment.”
MTN did not respond to the Mail & Guardian’s inquiry about whether it is still interested in acquiring Telkom.
At this point, even selling part of the company could help Telkom, but ultimately the entire business will need to be sold, Takaendesa said.
“Maybe MTN will come and buy a huge stake in the fibre business or they get an international tower company which will acquire all of their tower assets or a big chunk of Telkom’s tower assets,” he said.
“Then you’ll probably start to see some of the value of those assets being realised. It might even give them [Telkom] breathing room, which means the pressure that is building on the balance sheet now gets taken away because then they might get some cash coming in.
“It’s still not a bad idea to sell this business altogether. Then you have a business that actually has a chance of growing. It’s emotionally draining having to fire people every few years and having to let go of thousands of people. You are continuously fighting a declining thing.”
As part of the shift to its digital strategy, Telkom said it plans to cut as much as 15% of its workforce. The company has about 11 000 employees, which means up to 1 600 jobs will be axed.
Independent analyst Simon Brown said MTN is still a good fit for Telkom. “I do expect them to go back to those talks. But MTN management may be tired and will potentially offer a lower price.”
Brown noted that even the Rain deal may be back on the table. The deal fell through in January, with Telkom saying to shareholders: “After initial discussions, but prior to any due diligence, the parties have decided that a suitable transaction is not possible at this time.”
The government has a 40.5% stake in Telkom. Brown does not think Telkom is still attractive to the government as an asset because “dividends have all but disappeared”.
Telkom suspended its dividend policy for three years from its 2021 financial year to preserve its cash position and maintain a flexible balance sheet.
“Selling could generate some much needed cash. So I think they [government] could be very keen for a deal,” Brown said.