United Kingdom-headquartered cellphone giant Vodafone, is dangling a R60-billion carrot that would represent the country’s largest foreign investment to date, dwarfing the R33-billion Barclays invested for a controlling stake in Absa.
The R60-billion is what analysts estimate it would take for Vodafone to buy the 50% it does not own in Vodacom. This stake is owned by Telkom.
The R60-billion estimate is based on the price Vodafone paid in November to buy a 15% interest in Vodacom from Rembrandt’s investment arm, Venfin.
Telkom’s market capitalisation is R70-billion, meaning that the whole of its fixed-line monopoly business is valued at only R10-billion.
Cellular telephony contributed R17-billion in revenue to Telkom’s operations last year compared to fixed-line which generated R32-billion. This translates into R10-billion in operating profits for its fixed-line business and R4-billion for mobile.
Telkom, for all its ability to print money from its monopolistic fixed-line operations, attracts a dreary market rating with a price:earnings multiple of just 7.3. This is 54% less than that of MTN, the closest comparative company on the JSE, which has a price:earnings of 11.34.
Vodacom’s current ownership structure represents a significant loss of value to shareholders.
A Vodafone deal has the potential for Telkom shareholders to share a R60-billion cheque and still own the rest of the Telkom business, which would likely be subject to a market re-rating in the tens of billions.
The government is Telkom’s largest shareholder, with a 37% stake. A sale to Vodafone could net R22-billion for the fiscus.
Black economic empowerment grouping the Elephant Consortium, which is led by former department of communications director general Andile Ngcaba, is the second-largest shareholder with a 10,1% stake.
Ngcaba, estimated to personally own 1,15% of Telkom, stands to get R690-million of the R60-billion, should this scenario eventuate.
The Public Investment Corporation (PIC), which manages state pension funds, holds 8,3%, according to the Profile Media’s Stock Exchange Handbook.
The possible 50% sale of Telkom’s stake in Vodacom would bring a massive capital injection, be the largest single vote of investor confidence the country has seen and potentially increase competition in the telecommunications sector as Telkom rolls out wireless and mobile services and Vodacom increases its offerings, which were once Telkom’s preserve.
The government has made increased competition in the telecommunications sector a pivotal part of its current economic reform agenda.
While observers say Vodafone has no interest in Telkom’s fixed-line business, it could make a bid for Telkom rather than the unlisted Vodacom, but only to secure the 50% it does not own in Vodacom.
Vodafone, which is actively making investments in emerging markets, has reportedly lifted a previous restriction on Vodacom, which limited it to operating in Africa south of the equator.
It has now agreed that Vodacom can also operate further north. Observers believe that Vodafone will use Vodacom to house all its African operations.
Vodafone’s chief executive, Arun Sarin, was in South Africa last week and met senior government, regulators and industry executives. Business Times reported on Sunday that the UK telecoms giant looks set to purchase Telkom.
This led to a flurry of reaction that suggested the report as speculative, partly or wholly untrue.
A Vodafone source, speaking on background from the UK, said Vodafone had always said it was interested in upping its stake in Vodacom. He said this did not mean Vodafone was interested in buying Telkom.
“Why buy the company just to get the stake. Why not just buy the stake?”
A number of analysts who the Mail & Guardian spoke to on condition of anonymity suggested it was likely that there were two buyers, Telkom and Vodafone. The pair are interested in one another’s stakes.
“Yes, there are two buyers,” said one analyst. “They are trying to freeze each other out of the lucrative jewel in the crown which is Vodacom.”
One analyst said Vodafone could avoid a shareholder battle with -Telkom by purchasing the whole of Telkom. He described its current R70-billion price tag as “very cheap”.
“They can just go into the market and speak to the government and the Elephant Consortium and buy the whole asset.”
The analyst said that buying -Telkom for R70-billion would work out cheaper than buying Telkom’s 50% stake of Vodacom, given that Vodafone paid about R16-billion for Venfin’s 15% stake.
The analyst said he was confident that behind closed doors, negotiations were taking place. He said Telkom shareholders such as the government and Elephant stood to make a healthy profit in the event of a deal.
Another analyst said that Telkom would not give up its share in Vodacom without a fight, as the mobile operator was a “huge cash cow”.
“Telkom management would never agree to sell Vodacom. That just would not make sense,” he said. “They would be losing their golden goose.”
Telkom has denied that the sale of Telkom was discussed at the meeting last week between CEO Papi Molotsane and Vodafone CEO Sarin.
“The objective of the meeting was to explore possibilities of maximising our joint investment in Vodacom,” said Molotsane.
A Vodafone spokesperson said there was no truth to the speculation that Vodafone was interested in buying Telkom but did confirm that Sarin had met senior government officials and key Telkom investors while in South Africa.
Wiphold CEO Gloria Serobe, speaking on behalf of the Elephant Consortium, who denied they had had any meetings with Sarin, said: “If I saw him on the street I wouldn’t know him.”
Serobe said the Elephant Consortium had never discussed selling its shares in Telkom and if it did it would not need Vodafone because it was a listed asset. “Elephant is not in a selling mood,” said Serobe.
Fellow Elephant Consortium member Andile Ngcaba refused to comment, saying he was on leave overseas and not able to comment.
Thabang Chiloane, spokesperson for the deputy president’s office, confirmed that representatives had met Sarin for a breakfast briefing on ICT convergence, along with representatives from the Department of Trade and Industry, South African Airways, the SABC, the PIC and the Independent Communications Authority of South Africa.
Chiloane said no discussion took place relating to Vodafone’s interest in Telkom.