Telkom board turmoil to be probed

Investigation comes as utility prepares for dire financial results, writes Rob Rose

Telkom has hired KPMG to probe claims by outgoing CEO Reuben September that chairman Jeff Molobela broke governance rules, creating a "sub-optimal" board of directors unable to do its job.

This is Telkom's first tangible response to a board skirmish that will see September leave Telkom in the next five months, after repeatedly clashing with Molobela.

But this comes as Telkom prepares to announce results for the year to March tomorrow that are likely to show a lacklustre 2% improvement from last year's dire results. The main culprit is Multi-Links, a Nigerian company which Telkom bought for $410-million (R3-billion), but which will wipe R5.3-billion off its bottom line in impairments this year alone.

The financial turmoil adds to the company's governance crisis.

Already Telkom falls short of the King III governance code, which states that "a majority of non-executive directors should be independent" to ensure better protection for smaller shareholders. Only three of its seven non-executive directors - Brahm du Plessis, Peter Joubert and Sibusiso Luthuli - are independent.

On April 20, Telkom lost independent director David Barber who quit in disgust. Ekwow Spio-Garbrah, Ghana's former communications minister, was surprisingly fired as a director on April 28 by the government, which owns 39% of Telkom.

However, Barber's resignation letter reveals that Molobela overruled the board to veto the sale of Telkom's wireless data arm Swiftnet at a meeting on March 31.

In the letter, Barber said: "The way the Swiftnet disposal was handled once again displayed the inefficiency of the board processes, the lack of respect for the opinion of the majority of the board and, most importantly, the lack of faith of the chairman in his management team."

While the board agreed to sell Swiftnet for an amount believed to be close to R100-million, Barber said he was told Molobela used the government's "golden share" to overturn this decision.

The golden share falls away next March. Until then, it entitles the government, as Telkom's 39% shareholder, to appoint the chair, CEO and veto any deal worth more than 5% of Telkom's revenue.

Swiftnet, however, was worth less than 1% of Telkom's revenue.

"How can it be that management, supported by the majority of the board, cannot make a decision equivalent to 0.5% of Telkom's value? ... the chairman has acted (beyond his powers)," said Barber.

Barber said he resigned because if Molobela was right to use the golden share that way, "directors have no meaningful powers".

However, a number of Telkom insiders largely agreed that Molobela acted more like a CEO than a non-executive chairman. "The combination didn't work. Jeff was very difficult to deal with and behaves like he's an executive, and Reuben hadn't done a great job yet in turning around Telkom to be honest," said one.

September upped the ante by sending letters to Telkom's board this month, complaining that Molobela had usurped the role of CEO, tried to squeeze him out and contravened governance rules.

This week, Molobela confirmed that KPMG is doing an independent investigation into these claims, and is due to report back this month.

"The board recommended that those allegations that Reuben brought ... be investigated. We need to wait for that KPMG report to see ... whether we're well-governed or not," he said.

When asked about the Swiftnet veto, Molobela said the allegations were "far from the truth" and based on "selective information".

But he refused to elaborate, saying: "we will ask KPMG to report on that matter - specifically on the Swiftnet transaction."

The probe will also include whether Telkom's board complies with the King code.

Avior Research analyst David Lerche said: "The truth is, the strength of the board makes no difference at Telkom, because government owns the (golden share) which gives it the right to appoint management and decide on investments in its own interest."

While the boardroom battle is seen as the chief reason for September's imminent departure, others believe the dire performance of Multi-Links is related.

Telkom bought 75% of Multi-Links in May 2007 for $280-million (R2.1-billion) - a company with net assets of R338-million - under former CEO Papi Molotsane

In January 2009, under September, Telkom paid another $130-million (R975-million) for the other 25%. This was more than the $90-million it was obligated to pay, and three times more than a $44-million value set by KPMG.

The only Telkom director to object to the 25% purchase was Spio-Garbrah, who was then fired by government with no explanation.

It has been a costly blunder. Last year, Multi-Links made a R1.76-billion loss and September admitted "we underestimated the competitiveness of the Nigerian market". In 2009, Telkom impaired the value of Multi-Links by R462-million - a clear sign it paid too much for the company.

Tomorrow Telkom will report that the Multi-Links financial loss will exceed last year's R226-million. Worse still, Telkom will take a R5.3-billion hit as it writes down the value of Multi-Links to zero.

Overall, analysts expect Telkom to report "normalised" headline earnings (from businesses it has not sold) of around 514c/share, marginally higher than last year's dismal 506c/share.

But when hefty impairments for Multi-Links and other write-downs are included in its profit calculation, Telkom's headline earnings will plunge more than 80% from last year's 606c/share.