South African Telkom Reshuffles

Announces Yet Another Corporate Restructure

South Africa was the first country in the 1990s to issue GSM licences to Vodacom and MTN, and what a success story those two operators have become. Beyond dominating the South African market, they have built operations in Africa and have multibillion-dollar equity valuations.

Until 2009, Telkom was a shareholder in Vodacom. After selling its stake, it used the proceeds partly to give a special dividend to shareholders, but also wasted billions of dollars on an ill-judged investment in Nigeria.

In 2010, Telkom re-entered the South African mobile market as the fourth operator. But, seven years later, it has only about 3 million active subscribers — compared with market leader Vodacom’s 35 million — and lags third operator Cell C by about 10 million subscribers.

Earlier in 2017, Telkom made an offer to shareholders of Cell C to acquire the business. Strategically, this was a sensible move, but the financial aspects of the proposal didn’t satisfy Cell C’s shareholders.

Telkom was one of South Africa’s parastatals, or state-owned enterprises, and was partially privatised in 1997 when a 35 percent stake in the business was sold to a consortium from the US and Malaysia. Within five years, these investors had walked away from the business and Telkom ploughed on as a separately listed company.

Although Telkom has long had a reputation as a slow operator — both in terms of fixed-line access and transmission speeds, as well as customer response times — its 35 percent stake in Vodacom ensured the company had a healthy equity valuation.

In reality, the market was attributing very little value to the rest of Telkom’s business and so began a series of corporate restructures, including the sale of its stake in Vodacom and the ill-fated international expansion, as well as tinkering with business models in its domestic market.

However, the latest structure appears to be a logical move. Telkom has created four business units: retail (mobile, landline and broadband), IT services, wholesale and real estate. Broadly speaking, Telkom has organised its business around customers —comprising consumer, corporate and wholesale — rather than products. The real estate division will mainly hold the mobile towers, which will presumably be monetised soon.

An acquisition of Cell C still makes sound sense as South Africa can’t support four profitable mobile operators. Cell C’s shareholders have a valuation in mind which Telkom will need to agree to. A part-cash, part-stock offer would seem to be a fair compromise.

Nimble rivals such as Neotel, under the highly competent new ownership of Liquid Telecom, will continue to eat away at Telkom’s core business. But with the right management team and measurable performance targets, Telkom may finally start to show some green shoots.

This customer-focussed strategy is refreshing for Telkom and its long-standing customers. If executed correctly, it may just work. There may be light at the end of the dark, gloomy Telkom tunnel after all.