/ 18 August 2017

SAA squanders SA’s prized assets

Gordhan did not mention additional funds for the technically insolvent SAA.
Gordhan did not mention additional funds for the technically insolvent SAA.

It may be selling the family silver to bail out the family drunk … again. But parting with its stake in Telkom may be the government’s only option to recapitalise SAA relatively quickly. And it wouldn’t affect the national budget allocations.

The government’s 39% stake in the JSE-listed telecoms company, valued at roughly R14-billion, has been posited by among others the Democratic Alliance as the only way to meet these requirements.

The Public Investment Corporation’s (PIC) stake, at about 12% according to Telkom’s latest financial results, takes direct and indirect state ownership to about 52%.

Unlike putting SAA itself on the block, a stake in the PIC is something people might buy into.

But a sale of Telkom assets would probably be driven by “desperation”, said Dominic Cull, of the Ellipsis Group. “You are selling your revenue-generating asset to save your revenue-depleting asset.”

It is also likely there will be pushback from other quarters of government. Siyabonga Cwele, the minister of telecommunications and postal services, the department responsible for Telkom, is on record lauding past decisions not to sell the stake in Telkom.

At Telkom’s most recent results announcement, Cwele said: “These strong results underscore the correctness of government’s decision, working with other shareholders, to invest in turning around the company instead of selling it.”

He also encouraged other state-owned companies “that are in trouble to learn from Telkom how it achieved its turnaround”.

How desperate is the government?

In July, the state gave SAA a cash injection of R2.2-billion when one of its lenders, Standard Chartered, called up its loan.

Minister of Finance Malusi Gigaba notified Parliament late last month that the treasury was identifying assets for sale to ensure the spending would be budget-neutral and the details of this would be announced in the October adjustments budget.

But SAA has a further R13.8-billion in outstanding debt with other lenders, Gigaba told Parliament.

Along with other facilities, such as R522-million in letters of credit and R830-million in general banking facilities, the airline has used up R18.6-billion of the total R19.1-billion in government guarantees, all but wiping them out.

The treasury added that letting SAA default on its debts poses a real threat of contagion to other state-owned entities and their government-guaranteed debt.

On Wednesday ratings agency Moody’s warned that the bailout for SAA pointed to ongoing financial distress for state-owned enterprises (SOE). It said South Africa risked further credit downgrades if “liquidity pressures … re-emerge at state owned enterprises” that would require government action either through the activation of guarantees or “other measures”.

The treasury has previously said it will not divulge details of any asset sale before October “because government is minimising the risk of price manipulation by the markets if the noncore assets were to be disclosed before the conclusion of the transaction”.

The latest round of assistance will take the total amount of state aid to the airline to R38.5-billion since 1999, according to research by transport economist Joachim Vermooten.

But the government has already shown an appetite for the Telkom kind of deal, said Samantha Hartard, the sector head of industrials at Investec Asset Management, referring to the sale of its 13.9% stake in Vodacom in 2015 to help the power utility Eskom.

It managed to raise a significant amount, about R25-billion, so the precedent has been set, she said.

But Cull described Telkom as “a complete anomaly” among the parastatals for several reasons, including the level of transparency required of a listed company and the competitive market in which it operates.

“Telkom has had to struggle to survive and there is general agreement that they have done a damn good job of it,” he said.

Hartard said the current management team under chief executive Sipho Maseko and chief financial officer Deon Fredericks has overseen a turnaround that is reflected in the company’s share price. It has risen from lows of R11.93 in mid-2013 to just over R67 as of Wednesday this week.

The market rates the company far more highly than it did five to 10 years ago, with the valuation multiples, such as its forward price-earnings ratio, having improved significantly from three in 2008 to the current multiple of 11, Hartard said.

With the Vodacom deal, the PIC bought the government’s stake at the market price and, if the state sells its Telkom shares to the PIC, it will still retain its ownership, albeit indirectly, she said.

“The government has had no interference in the running of Telkom’s operations and this sale would have no impact on the board composition or the day-to-day running of the company,” she added.

The PIC manages the Government Employees Pension Fund (GEPF), and it has been adamant that pensioners’ money will not be used to bail out the airline.

In a statement responding to comments made by treasury officials in Parliament in May, mooting the use of the PIC to help the airline, it was quick to assure pensioners that it would not be funding SAA.

The fund had “not received or been approached with such a proposal and no discussions have been held with GEPF on this matter”, it said.

This has not stopped the national carrier from highlighting in its annual corporate plan the possible need to raise R6-billion from the PIC.

Cull questioned whether the PIC would risk so much exposure to one share, but Hartard said it is not uncommon for the PIC to take big positions in certain cases. It has done so with other SOE debt, she argued, taking on more of their bonds as interest by private sector investors has waned.

The PIC also underwrote Lonmin’s rights issue to assist the mining company to remain a going concern and now owns 29% of it, she said.

Referring to whether the PIC would be reluctant to hold 50% of a company’s equity, she said it has taken up 79% in a small black economic empowerment hospital player, RH Bophelo, that recently listed.

As concerns about the governance of the parastatals have been compounded and the funding for them has been shrinking, more and more questions have been asked about the extent to which the PIC will be leaned on to prop them up.

But the PIC has assured GEPF fund members in recent months that all its investment decisions are taken in their best interests, and in line with the “client mandate requirements” and the risk parameters stipulated by them.

In the case of GEPF money, the “continued support of SOEs will be underpinned by those mandate requirements” and are subject to robust due diligence, it has said.

If the state does decide to sell its Telkom stake, its options could be to sell to an existing market player or to an empowerment consortium to increase black ownership in the sector.

But Cull said a sale to an incumbent operator such as Vodacom or MTN would face competition problems and, although the creation of a new empowerment entity was a possibility, there was the real challenge of “raising hard cash by a deadline”.

Telkom has a strategic role to play in the future communications network of the country, he said, and he questioned whether the state would conceivably divest from telecoms at this juncture. It would amount to “a grudge sale”, he said.

But the DA’s Alf Lees, a member of the parliamentary standing committee on finance, said “there really isn’t a choice”.

Although it may amount to throwing good money after bad, this had already happened, he said, pointing out that the government has issued R19-billion in guarantees, but this “has already been spent to fund losses”.

The PIC could lend SAA the funds necessary to keep it afloat, but this would be a very bad use of pensioners’ money, he said.

An SAA bailout is likely, although the business should then be placed into business rescue and commercially managed out of its current crisis, Lees said, adding that political interference at the airline would need to end.

Although the source of the bailout is still up for debate, the fact is that will have to be used to repay banks for money “they have already lent [SAA]”, he said.