The listing of at least 20% of South African telecommunications utility Telkom on the JSE Securities Exchange South Africa (JSE) and New York Stock Exchange early next year is likely to be one of the biggest business stories of 2003 and will see many South Africans buying shares for the first time.
However, the success of the initial public offering (IPO) is by no means guaranteed and many market players are thinking carefully about investing in the share.
“I just think the telecoms industry still has to work off its debt,” says David Shapiro, market analyst at Corpcapital. He said that as this debt had been used to fund expansion, there was also excess capacity.
While this did not necessarily apply to Telkom, the global weakness in the sector made the share undesirable.
“Generally, international analysts are so nervous of the sector, I think they will shy away from it,” he said.
Dawie Roodt, economist at PLJ Financial Services, agreed that Telkom’s listing was coming at a bad time.
He felt there was no reason to privatise Telkom at the moment. While the state plans to raise R12-billion from privatisation in the current fiscal year, he asserted that the money was not needed at the moment.
Roodt argued that it was more important to improve competition and effectiveness in the sector, which would not happen until the second national operator (SNO) was up and running.
“Given the circumstances, I don’t think government should privatise Telkom now. They should rather go for something else like the Airports Company to show their commitment to privatisation.”
However, BMI-TechKnowledge senior telecommunications analyst Dobek Pater stressed that the IPO could not be delayed.
“If Telkom is not listed now, it would cast serious doubt on the South African government’s willingness to privatise state assets, which would not only put South Africa on a bad footing with global financial organisations, such as the World Bank and IMF, but also create doubt in the minds of many other institutional and private investors regarding future investment opportunities in South Africa.
“In other words, economic repercussions following such a decision could be too severe.”
Pater said that while he expected the entire 20% of Telkom floated on the respective stock exchanges (JSE and NYSE) to be taken up by investors, government was unlikely to realise the funds expected from the privatisation.
“A few years ago, Telkom was valued at R75-billion to R125-billion. Now, it is valued at R30-billion to R40-billion. If we take the Vodacom component out of this, we are left with about 25 billion to 30 billion rand. If we take a 20% share of this, we are looking at five to six billion rand maximum realised from the listing. This is half of what the government had in mind last year.”
Roodt said, however, that it was still possible to have a relatively successful IPO.
“If the share price is correct, it will stabilise and even go up within a couple of months,” he said. “It is extremely important not to list Telkom at a price where the share is going to fall.”
He explained that government was planning to use the IPO as an empowerment vehicle and attract small investors. But if they lost money, government would have “egg on its face.”
Shapiro agreed that Telkom’s listing price was crucial. However, he questioned whether Telkom would make a desirable investment unless the shares were “given away for nothing”.
On the other hand, the listing was a historic event that one wanted to be involved in. At the end of the day, he maintained that there were a number of local companies offering better investment opportunities.
“Why go into an industry that is underperforming globally at a time when competition is being introduced?” he asked.
He noted that one of the main attractions of Telkom was its 50% stake in cellular network operator Vodacom.
“I’d rather invest in Vodacom via VenFin,” he said.
A second dealer said that whether he invested in Telkom would depend entirely on the share price. “Incumbents always do well. Would I want it? Price would be the indicator.”
However, Shapiro disagreed, saying that while incumbents had performed well during the 1990s, their performance in the last couple of years had been disastrous and competitors had fared even worse.
Pater said that there was no clear-cut case on how incumbent telecommunications operators fared after listing. Factors that determined this included their strength and market conditions, including competition. How many shares were listed was also a factor.
“It might be worth it,” said a third dealer. “But I think the offer is going to be extremely oversubscribed, so you’ll only get a fraction of the shares applied for. You will lose interest on the money for the period, yet I think it might be worth it.” – I-Net Bridge