How Telkom killed its TV show

Telecommunications behemoth Telkom stands accused of being a headless chicken. Critics say it is confused about its business strategy, which is causing a huge loss to shareholders.

Interviews with industry insiders and a perusal of internal documents show that in the case of Telkom Media, its content arm, the telecommunications operator has in a matter of months aborted a new strategic direction at a significant cost.

Analysts have called for new leadership to steer the fixed-line incumbent. If only a few recent about-turns by Telkom are considered, they have a point.

Faced with dwindling revenue from its fixed-line voice market, Telkom’s initial strategy was to plough R7-billion into Telkom Media—its new broadcasting arm—hoping to use the quad-play model of packaged fixed-line, mobile, broadband and broadcasting services to turn the company around.

Of this R7-billion, just more than R5-billion would be raised through share capital from Telkom and its minority shareholders.
The other R2-billion would be secured via shareholder loans. Telkom’s share capital amounted to almost R3,5-billion of the R5-billion.

It successfully argued a case before the Independent Communications Authority of South Africa, and in September 2007 it was awarded one of four new licences into the pay-TV market.

Then, in March this year, Telkom announced that it was significantly reducing its funding in Telkom Media by R2,2-billion, claiming that competing initiatives such as a mobile wireless network had a shorter period of return and was a better investment.

This effectively reduced Telkom’s share capital investment by almost 63% from R3,5-billion to R1,3-billion—this after Telkom Media had spent more than R700-million securing content, building broadcast studios, signing five-year leases for buildings, purchasing equipment and head-hunting staff from other broadcasters, said sources close to the broadcaster.

Insiders say more than R300-million-worth of content contracts are on hold after Telkom announced its reduction in capital investment.

The disinvestment by Telkom has thrown the entire business plan for Telkom Media into a spin and staff have told the Mail & Guardian that some of the minority shareholders’ stakes are also up for sale, although none of them would discuss this with the M&G.

That Telkom’s board approved a business strategy and allowed significant expenditure in setting up a new business, only to renege on the funding commitments less than a year later, raises serious corporate governance issues.

Telkom has not communicated the reasons for this about-turn to the markets in South Africa or New York where it is listed, merely stating that the money is being redirected to other initiatives.

Questions have been raised about whether Telkom Media misled Icasa during the pay-TV licence hearings, because it made the claim that the business plan had been approved and that R6-billion in funding was only dependent on Telkom Media receiving a licence.

But Telkom’s chief of strategy Naas Fourie told the M&G this week that no amount was promised to Telkom Media and the board did not approve a final amount in this regard.

The question also has to be asked whether Telkom’s major shareholders, such as the government and the Public Investment Corporation, had approved this planned R6-billion investment and whether they approved the disinvestment too.

While Telkom Media teeters on the brink, waiting to see if Telkom can come up with a buyer for the shares that are up for sale, Telkom has entered into discussions with Tokyo Sexwale’s Mvelaphanda Group that could see it offload its 50% share in Vodacom and sell off its fixed-line business too.

Telkom CEO Reuben September also announced at the telco’s recent results announcement that if Telkom offloaded its share in Vodacom, it would be prepared to go it alone on the mobile front, launching a new operator into the market that would partly run on its own mobile wireless network and partly roam on other partners’ networks.

“We said that we will only consider exiting Vodacom if there is an alternative equal to or better than Vodacom,” said September in an interview last week with the M&G. “That took us to a process of evaluating alternatives; subsequent to that process we acquired the critical spectrum 1 800 MHz to 2 100 MHz, hence my announcement on the 31st of March that we will roll out a fixed wireless network.

“That puts Telkom as a standalone in a completely different perspective,” said September.

Telkom gained entitlement to this spectrum as a result of the Telecommunications Amendment Act of 2001 and could have requested the issuing of the licence for this spectrum from Icasa at any time since then. However, the licence was only issued to Telkom within the past six to seven weeks.

The fact that Telkom is in the middle of a restructuring process that will see core business areas such as its network and IT departments outsourced hardly inspires confidence in Telkom going it alone in the mobile space.

By outsourcing its core business, Telkom’s management is in fact admitting that it cannot effectively run the business which they are employed to head up, so why would its new mobile entrant be a success?

On the face of it, these about-turns in strategy directions appear to be a severe indictment on the state of the executive leadership of the company, which can’t seem to make up its mind on the best way forward for the company.

Telkom responds
“The landscape for content sourcing has changed, rendering the company’s ownership of substantial equity in a content-providing entity unnecessary,” says Telkom’s Fourie. “In this regard, quality content can be sourced from other operators.

“This is especially pertinent when the required outlay of capital funding and pay-back period relating to the Telkom Media investment has since been outweighed by other priorities.

“No amount was promised towards Telkom Media; neither did the Telkom board approve any final amount in this regard. A business decision was made at the time, with the consent of the Telkom board, to pursue the broadcasting proposition via Telkom Media. The decision has since been reversed for reasons highlighted above.

“The amount lent to Telkom Media, as per the company’s annual statements for the financial year ending March 31 2008, was R325-million. There was also no withdrawal of funds since Telkom Media was formed.

“Since the decision to significantly reduce its investment in Telkom Media, the company has restricted funding to cover essential operational costs only. Telkom will continue funding in this manner until the current process is concluded. “

“Telkom is comfortable that the pursuing of the Telkom Media proposition was approved by the parties in question by virtue of their significant representation on the company’s board of directors.

“Shareholder approval per se was not required for the investment in Telkom Media. Several potentially interested and suitable investors were identified and approached directly.”

Lloyd Gedye

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