CAIPHUS KGOSANA | It’s raining investors for Telkom, and I say why not

Telkom is being wooed by MTN and Rain, but the government will have a big say in how this ends

16 August 2022 - 20:11
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Telkom is a smaller player with a R24bn market capitalisation.
LET IT RAIN Telkom is a smaller player with a R24bn market capitalisation.
Image: Bloomberg

Rain — the high-speed network operator — entered the race for Telkom in a mischievous way last week. It issued a statement announcing its desire to merge with its competitor to create a 5G powerhouse that would become a strong third player able to take on the Vodacom-MTN duopoly.

Only one problem here: MTN has already publicly announced its intention to acquire Telkom in its entirety — either through a straight cash sale or a combination of cash and shares.

Rain’s premature announcement irked not just the regulator of takeovers, which ordered it to withdraw the statement, but Telkom itself did not take kindly to being ambushed in this manner.

It issued a Sens (Stock Exchange News Service) announcement on Friday saying no offer or proposal had been received from Rain. Should this happen, Telkom added, the board would consider it in accordance with its legal obligations.

Having successfully thrown a spanner in the works, Rain on Tuesday morning withdrew the statement. But it has achieved its objectives.

Look at the clever play on words in their troublesome announcement — “a strong third player” competing against “a telecommunications duopoly”. That was directed not just at the Telkom board but to competition authorities as well; a subtle but powerful message that says the merged entity we are proposing would be more competitive than the duopoly that would result from MTN swallowing up Telkom.

In a way Rain is correct. The third network operator, Cell C, is minuscule compared with the two giants. It’s beset by financial woes requiring restructuring and recapitalisation. Telkom is also a smaller player with a R24bn market capitalisation but has managed to punch above its weight thanks to visionary leadership. It’s a nimble company from the flat-footed monopoly that battled to modernise after liberalisation of the telecom sector.

As Peter Takaendesa, head of equity at Mergence Investment Managers, told Business Times, everyone is realising the value hidden in Telkom as a group. Like Rain, it successfully bid for radio frequency spectrum and has huge network infrastructure which — combined with Rain’s large 5G network in SA — could give both Vodacom and MTN a serious run for their money.

Telkom succeeded because the government got out of the way and allowed professionals to do their job.

It also helps that, despite the state holding a sizeable 55% stake (40% directly and another 15% via the Public Investment Corporation), Telkom is fully corporatised and run professionally as a listed company. It’s not moribund like Eskom, Transnet, Denel and other fully state owned-companies inhibited by having to comply with red-tape-heavy legislation such as the Public Finance Management Act and run by boards and executives appointed by politicians, making them easy to capture.

The government does not nominate members to the Telkom board. The golden shareholding that existed since 2002 ended after the initial public offering in 2012. It has its own nominations committee and procedures that are presented at its AGM for approval.

Imagine if Sipho Maseko — credited with rescuing Telkom from its initial confusion after the listing and turning it around into a profitable company — had to report to a board chosen by Faith Muthambi when she was communications minister? Or if the Guptas (God forbid!) had a hand in choosing its board when they were capturing the state. Telkom succeeded because government got out of the way and allowed professionals to do their job.

In fact, when communications and digital technology minister Khumbudzo Ntshavheni tried to strong-arm it into withdrawing a court case challenging communications regulator Icasa’s design of the spectrum auction (before an out-of-court settlement was agreed to), the company told her where to get off.

Be that as it may, no-one can discuss and decide on the future of Telkom without a serious engagement with its major shareholders. From what I understand, there is opposition from within cabinet and the ANC to the government disposing of its stake in Telkom.

“We’ll be accused of selling more state assets,” a senior ANC leader told me confidentially.

But is Telkom really a state asset? Is it not a passive investment that cuts Treasury handsome dividend cheques once in a while? Does the government still need to own a stake in a modernised telecom company, or should it take the money and direct it towards social expenditure?

I’d say the state can exit Telkom but not the PIC. That would be easier if the MTN’s buyout proposal was accepted by Telkom.

It’s more complicated in the case of the Rain proposal and would depend on how it’s structured. Government’s stake would obviously be diluted if Rain and Telkom were to merge. Will they offer to buy out the state? If so, how much would they be willing to pay? Some small company offered R7bn for the government’s 40% stake, but they were quickly shooed off.

It’s still early days, but either way the state will have a big say in what becomes of Telkom. 

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