Telkom’s big squeeze

Telkom may be about to secure a R22,5-billion windfall for offloading its 50% stake in Vodacom but it has never been under the kind of pressure it is currently facing.

Vodafone’s R22,5-billion offer for a further 15% in Vodacom, which was announced late last week, has resulted in Moody’s Investors Service placing Telkom’s credit ratings under review for a possible downgrade.

At the same time Telkom is facing increased pressure from Neotel, the competitive enterprise and consumers services of which have enticed many valuable Telkom customers to jump ship, while mobile players like MTN and Vodacom are successfully taking it on in the broadband space, because of its inability to meet demand.

Add to this the fact that Telkom announced this week that its big restructuring programme, which would have seen its core business outsourced in an attempt to turn the tele­coms giant into what management envisions would be a leaner, meaner fighting machine, has been suspended.

The decision to suspend the restructuring process comes very late in the day as Telkom was already considering bids from vendors.

The telco was looking to outsource a substantial amount of its core business, including its network operations, information operations and Telkom Direct shops.

It was expected that the deal would have affected 19 000 of Telkom’s 26 000 staff, which obviously did not sit well with the unions.

“The unions have obviously brought some significant pressure to bear,” said IDC telecoms analyst Richard Hurst. “Telkom will have to relook at how they are going to do this.”

Telkom’s statement said that the decision to defer the implementation of the capability management project until April 2009 has been agreed upon by the unions and itself and that it has signed a memorandum of understanding with the unions.

After months of negotiations between Telkom and Vodafone, both 50% shareholders in Vodacom, a cautionary released by Telkom detailing the Vodafone offer seems to suggest that a deal is imminent, which is a significant development in the current global economic climate.

Telkom’s cautionary details Vodafone’s R22,5-billion offer, from which the attributable net debt of Vodacom at the time of signing would be deducted.

The cautionary stated that the deal was dependent on Telkom unbundling its remaining 35% stake in Vodacom to its shareholders, which would be followed by a listing of Vodacom on the main board of the JSE.

The cautionary also stated that the Telkom board and the South African government were supportive of the proposed transaction.

Moody’s statement said the factors that influenced its decision include the “increasingly competitive environment” in which Telkom operates, the fact that the fixed-line business is already “under price and volume pressure” and the impact that the current economic climate will have on Telkom’s ability to borrow money in the next two years for its capex and investment programme.

Moody’s says the rating impact of the Vodacom disposal is vitally dependent on the final use of the proceeds and its likely future strategy with respect to its mobile business.

It is expected that a lot of pressure will be brought to bear on Telkom by shareholders who will want a significant dividend paid out from the Vodacom sale profits, but Telkom would want to retain as much of the R22,5-billion as possible to plough back into the company. Without the Vodacom cash cow, speculation is rife as to Telkom’s future, with many suggesting that if it goes it alone in the mobile space it will find it tough going.

“This is a brave move if it materialises, as the market is already quite mature,” said Gartner telecoms analyst Will Hahn.

“To go it alone will take some doing,” said the IDC’s Hurst.

One thing is for sure: Vodacom will be freed up for further expansion into Africa and will probably look to take Telkom on in some of its core business areas.

It has already signalled its intentions by launching Vodacom Business and laying substantial amounts of fibre in South Africa.

The deal could also result in Telkom becoming a strategic acquisition target for international players looking to get into the South African market, due to its large customer base and its network infrastructure.

Hurst said that Cell C’s parent company, Oger Telecom, and Kuwaiti-based Zain Mobile could be interested in Telkom, but that there could be other suitors such as some of the Chinese mobile players.

Genesis Analytics’s James Hodge said he does not think that government would allow an international company to buy the rest of Telkom.

Another analyst, who did not want to be named, said that Telkom could be a juicy target but only for someone who has the skills and management capability to take it on, because there is a perception that it is “a ship with a lot of holes”.

“I am not sure how healthy the beast is,” said the analyst.

“Telkom is indeed taking a hard look at its operations, structure and strategy and the sense I get is similar to that of a sports team that is close to playoff calibre, but approaching the trade deadline: everything is on the table and all kinds of deals, not just the one we’re hearing about today, are possible,” said Hahn.

Whichever way things play out it is clear that Vodafone’s intentions to secure a controlling interest in Vodacom are set to shake up the telecoms sector in South Africa substantially.

Telkom’s competitors are clearly seeing it as an opportunity, with Neotel’s head of strategy Angus Hay stating that “there is little doubt that current market changes may affect the balance of power between players and will result in greater competition, which is good for customers.”

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories


Subscribers only

Come what may, the UIF will pay

The fund – the main safety net for unemployed workers – will run at an almost R20-billion deficit

‘Terrorised’ family shines a light on traditional leadership for vulnerable...

The ambiguity between traditional and constitutional leadership has been exposed by the violent banishment of an Eastern Cape family

More top stories

Remote working: Bosses want ‘bums on seats’

Many workers, including managers, like working remotely, but research shows it can be tough on most other employees.

Living with Long Covid in Lagos

Most people recover from Covid‑19 quickly, but Long Haulers in Nigeria are turning to one another for support

Financial sector increases its government debt to 22%

The banking sector will be in a vulnerable position if the national treasury does not stabilise its debt

Get to grips with the brains of youth

Shaping the frontal cortex as a critical youth development strategy

press releases

Loading latest Press Releases…