Fixed-line monopoly Telkom was the subject of speculation recently about what would have been one of the biggest black economic empowerment (BEE) deals ever.
Reports were that 15,1% of Telkom, worth about R6-billion, was available to an empowerment grouping. Names mentioned were not only African National Congress big-hitters, but also people who had been in the government, specifically former communications minister Jay Naidoo and former director general Andile Ngcaba.
The Democratic Alliance seized the opportunity to tap into apparently growing resentment of ”enrichment of the few” by calling for creative financing to buy the shares for a ”people’s consortium”.
The stake on offer would become available from the foreign strategic equity partner Thintana divesting itself of its remaining stake in the monopoly. In June Thintana, comprising SBC Communications and Telekom Malaysia, sold half the 30% it originally bought in Telkom in South Africa’s first big privatisation exercise in May 1997, for $1,3-billion.
The monopoly on fixed-line services Thintana was guaranteed in return for the investment is over, and liberalisation looms, so it looks likely that Thintana will also sell its remaining 14,9% stake soon.
Using that 15,1% for an empowerment equity deal would solve the embarrassing problem of Telkom’s vanishing empowerment credentials.
As part of the privatisation exercise, 10% of Telkom was reserved for disadvantaged groups. In March 2001 the government sold a 3% stake in Telkom from its holdings to BEE consortium Ucingo Investments. In September last year funding constraints forced Ucingo to sell, leaving Telkom with no visible empowerment stake.
Telkom owns 50% of Vodacom, which has, in turn, no empowerment stake. Its two main competitors, MTN and Cell C, are BEE companies.
Telkom has had no success with BEE, apart from internal transformation, which all sizeable companies, whatever their ownership, will be under pressure to achieve, and procurement. As BEE charters are implemented, affirmative procurement will also be the rule.
Telkom’s annual report (filed with the United States Securities and Exchange Commission) notes that the 40% BEE partner of wireless data subsidiary Swiftnet has also been unable to raise funding. This has left Swiftnet in breach of the Independent Communications Authority of South Africa’s licence obligations, which require at least 30% to be held by historically disadvantaged individuals or entities.
How can the government, as majority owner of Telkom, point a finger at white ownership when Telkom itself has no BEE ownership stake?
The much-vaunted Khulisa preferential offering of shares to black people as part of the listing of the company on the JSE Securities Exchange resulted in many black individuals and groups owning only about 1% in Telkom in total.
The Information Communications Technology (ICT) Charter, now moving towards conclusion, will probably demand that companies in the sector facilitate transfer of at least 25% of equity to black ownership.
But what logic is there in Thintana using BEE as an exit strategy now? It has fulfilled its part of the bargain, bringing in temporary expatriate management to beef up management skills within Telkom and to make the company more efficient. It has rolled out most of the lines it promised to, even if a fair number of those have been disconnected for non-payment.
In return Thintana has profited handsomely, selling half its stake for just less than $1-billion, almost as much as it paid for the entire 30% in 1997. When it sells the other half, it will have made about $1-billion.
Why should Thintana sell those shares to an empowerment entity rather than on the open market? The shares would have to be discounted to make it attractive to a BEE consortium — otherwise it may as well buy them on the open market. And, more importantly, why not use some of the 38% of Telkom that still belongs to government for empowerment? After all, the government expects white shareholders to subsidise empowerment through discounts or by diluting the value of their shares, or through some form of vendor financing.
The Treasury may ask why the citizens of the country should finance BEE, since it is a business imperative, and Telkom is a private company, albeit majority-owned by the government.
Telkom has bought back R1,7-billion of its own shares, about 4%, so it is clearly not lacking in cash for vendor financing, though the 25% target mentioned in the draft ICT charter translates into about R11-billion. This single deal would be more than half the peak annual deal flow recorded by the BusinessMap Foundation of R21,2-billion in 2003.
This would indeed be a big deal, and it would have to be done ”creatively” — to borrow the DA’s phrase — to avoid new sensitivities about benefits for the politically connected and already empowered.
Why 25%, however, and why a consortium? The Financial Services Charter allowed counting black ”indirect” equity — through pension funds, retirement annuities and unit trusts — as 15% of a 25% target. We don’t know what Telkom’s indirect equity ownership is, though it is unlikely to be more than the 15% or so average.
The idea of a black consortium or company having a 25% (or 25,01% to be precise) direct stake in a white company is to give it some control of decisions made by the company, to accelerate transformation as well as ensure the minority black shareholders are not deprived of benefits by the majority shareholders.
Since the government’s majority ownership will continue to allow it to control Telkom, need the black shareholding be owned by a consortium at all, rather than a large number of smaller shareholders?
Reg Rumney is director of the BusinessMap Foundation