Unbundling of Telkom is only answer
Last week Telkom was a lumbering giant stumbling from one bad investment to the next. This week the listed telecommunications operator is a lumbering giant trying to dodge a R4.5-billion fine for alleged anti-competitive conduct, which it says could sink it financially.
Telkom’s argument is that, because of its overall importance to the state, business and the economy, it is too big to be allowed to fail. But if that is the case, why has it been allowed to squander shareholder value systematically over the past decade under the watchful eye of its largest shareholder, the government?
The government owns 39% and its multi-asset manager, the Public Investment Corporation, holds slightly more than 10% of Telkom.
The fixed-line operator has a market capitalisation of R14.7-billion, meaning a fine of R4.5-billion would destroy 31% of its value.
Telkom’s share price is already worth less than its net asset value. In April last year this value was measured at R40.22 a share; its current share price is about R27.95. The price reached a 2011 high of R38.49 in May.
So, is it not time for the government to flex its muscle and strip the fixed-line operator’s assets to gain maximum value from them?
Competition in the sector would receive a big boost if, for example, Telkom’s local-loop metro networks and national long-distance networks were stripped from the company and placed in another entity, which would provide open access to them on a cost-based model. Telkom could still service its customers by buying access to its former network at the same price and on the same conditions as its competitors. And South Africans would no longer be held to ransom by a mismanaged, partially state-owned entity.
However, cynics would ask why the government would take a step like that. It received almost R300-million in dividends from Telkom in the past financial year—and personally oversaw Telkom getting itself into its current sticky financial situation.
The charges and penalty
The Competition Commission is pushing hard for a R4.5-billion fine, which is more than double Telkom’s R2.23-billion profit last year. Telkom insists that a fine of that magnitude could lead to its “financial demise”.
The company is accused of abusing its dominant position by charging excessive prices, refusing access to an essential facility and engaging in price discrimination, which makes its downstream rivals less competitive in the telecommunications market.
The commission says Telkom’s alleged anti-competitive pricing took place over a long period and at a time when new services were entering the market, and that its conduct has had a lasting effect on these services and affected consumers adversely.
This alleged misconduct predates 2002 when the initial complaint was lodged. The commission’s case has been subject to many legal challenges that have delayed the case.
Telkom has denied the allegations and has been defending itself at the Competition Tribunal hearing. It has gone as far as calling for the penalty to be “nominal” and “symbolic”, a move that is sure to irk stakeholders in the value-added network services sector that claim to have suffered because of Telkom’s alleged discriminatory conduct.
But Telkom in 2012 is a very different-looking animal to the Telkom of 10 years ago. Plagued by shocking mismanagement, an infamously poor customer service record and some seriously misguided investments over the past decade, Telkom has lurched from one crisis to the next. Its shareholders, the largest of which is the government, have sat back and allowed the operator to haemorrhage shareholder value.
Telkom off-loaded its 50% shareholding in cash cow Vodacom in 2009 and has experienced a decline in fixed-line rentals, which resulted in plummeting profits. In 2007 it had a profit of R5.69-billion; by 2011 it had halved to R2.23-billion.
Where to now?
It is clear that Telkom is a ghost of its former self. But in the face of the charges it is pleading poverty and making a case for its survival, arguing that it is too big to be allowed to fail.
“Since Telkom is still the largest supplier of fixed-line communication networks upon which banks, financial institutions, government departments, the defence force, police and industry rely, a fine of this magnitude will have disastrous consequences for the South African economy and government,” it states in its heads of argument.
Much like the banks overseas during the economic crisis, Telkom is pleading for special treatment. By asking the government for a reduced fine if it is found guilty of anti-competitive practices, it is in effect pleading for a bailout, arguing that it is in the national interest.
But what would the consumer get out of the deal? And why should the government, which oversaw this catastrophic mess, not answer to the consumer?
Ultimately the commission, if successful with its case, will have Telkom looking down the barrel of a gun: there is another case, referred to the commission in 2009, that has to be brought before the tribunal.
The commission is understood to be eagerly awaiting a ruling in the current tribunal hearing because it may have an impact on the success of its other case, which involves similar allegations of anti-competitive conduct but with different technology. So, if Telkom loses the current hearing, it will also be facing more headaches around the corner, apart from being in deep financial trouble.
One has to ask the question: If Telkom is too big to be allowed to fail, isn’t it time for the government to flex its muscle and unbundle the fixed-line operator?
Can the South African economy afford to have Telkom maintain its current trajectory? The answer is no and the time for action is now.