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JIMMY MOYAHA: This agreement has been in the works for about three years now. It has encountered multiple hurdles, including regulatory approvals, but has now successfully navigated those challenges. Icasa, the Independent Communications Authority of South Africa, has given the green light for the sale of Telkom’s masts and towers business, Swiftnet, as part of this R6.75 billion deal.
I’m joined by tech analyst and journalist from Business Day, Mudiwa Gavaza, to delve deeper into this topic. Good evening, Mudiwa. It’s always a pleasure to see you.
The last time we discussed this deal, we were having coffee and doubted whether it would actually transpire. We had differing views regarding the buyer’s readiness and the potential for approval, and it appears that we are finally seeing some progress.
MUDIWA GAVAZA: Indeed, we are advancing, and Telkom will soon be able to remove this business from its books.
They have been working on this deal for approximately five years now.
As you previously mentioned, the negotiations have been lengthy and turbulent, but they have succeeded in reaching an agreement, although at a significantly reduced value compared to earlier discussions.
JIMMY MOYAHA: Mudiwa, what are the implications for Telkom? They will divest from 4,000 towers and masts in the Swiftnet division, potentially gaining some revenue. What comes next?
MUDIWA GAVAZA: Several elements are influencing this situation. It’s crucial to recognize that market conditions have shifted dramatically since 2019 when Telkom, under Sipho Maseko, first indicated a desire to sell.
At that time, the valuation was estimated to be around R13 billion. Observers will recall that Telkom had suspended dividends and accrued significant debt for infrastructure improvements, making this deal vital for alleviating that debt and enhancing cash flow.
That reasoning remains, but the current valuation is considerably lower.
The original valuation was R13 billion, which declined to R10 billion, and eventually to below R10 billion, culminating in the current R6.75 billion.
It is anticipated that the proceeds from this sale will primarily be used to pay off debt.
Recently, we talked with their CEO, Serame Taukobong, who expressed contentment with the group’s debt ratio, which has improved from over 1.8 times to roughly 1.2/1.3 times, and may decrease further with this transaction.
Additionally, they plan to direct funds towards capital expenditure (capex) to enhance mobile network coverage in high-demand areas and improve fiber connectivity where necessary.
JIMMY MOYAHA: Mudiwa, the company is faced with challenging decisions as it navigates this new landscape, knowing that its strategies will diverge significantly from previous plans. What remains of the organization following this transaction?
MUDIWA GAVAZA: After the transaction, there will be three core divisions left.
Telkom will keep its Consumer division, which mainly consists of Telkom Mobile, the systems integrator BCX, and Openserve, which focuses on fiber.
Previously, Telkom operated around five divisions until the sale of Swiftnet and their properties business, Gyro, which has also witnessed significant divestitures. They will now be left with a mobile division, a fiber infrastructure unit, and a systems integrator.
The company’s strategy indicates that all its services will depend on fiber infrastructure, and as the largest fiber network operator in the country, it aims to compete effectively against competitors.
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As they enter the market, they possess a mobile business supported by fiber, considering that much of the capital investments made by competitors like Vodacom and MTN include ‘fiber backhaul,’ which connects tower infrastructure to core networks.
Given Telkom’s prior investments, they should incur lower capex costs than their competitors. If Serame’s analysis holds true, they are also managing more data and deploying their capex more effectively.
JIMMY MOYAHA: In the telecommunications sector, we’ve discussed positioning strategies. Should one be a tech provider or an infrastructure provider? The sale of Swiftnet by Telkom likely aims to alleviate the infrastructure burden on its balance sheet. Other telcos have pursued the MVNO route, choosing to utilize external infrastructure.
How can we decrease fiber costs, given that Openserve and Telkom are in a prime position to achieve this while still maintaining profitability?
MUDIWA GAVAZA: Jimmy, that’s a significant point.
Grasping Telkom’s position in the market is likely what keeps Serame’s team actively engaged.
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Should they be evaluated as a conventional fixed-line operator when their legacy business constitutes only 20% of their operations? Should they be viewed as a fiber network operator or as a mobile operator given their rapid expansion?
For example, Vodacom is primarily regarded as a mobile operator, even though they have broader fiber ambitions through partnerships with companies like Remgro and Maziv.
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Telkom functions as a mobile provider, but it also includes various segments that contribute significantly to its revenue.
From my point of view, they must enhance market understanding of their business model and what drives revenue and profitability. The efficiencies we discussed earlier, where mobile and infrastructure operations are interconnected with the established fiber network, require clearer communication.
If you assess them purely as a mobile provider, they may seem to lag. Similarly, evaluating them based on a single segment might underscore weaknesses in profits or capex commitments.
Effective communication is essential.
Furthermore, analysts may require a blended perspective when evaluating Telkom, as their BCX unit competes with entities like Altron and EOH, while Telkom Mobile competes against MTN and Vodacom, and their fiber division competes with Vumatel and MetroFibre.
Read: Data-driven approach powers Telkom’s HY growth
To me, an integrated analysis is vital moving forward. Whether market players will adopt this approach remains uncertain. You often investigate these trends; what’s your perspective?
JIMMY MOYAHA: [Chuckling] We’ve addressed numerous topics. I’d like to highlight that they are still partially a state-owned enterprise (SOE). We haven’t even touched on that aspect. They encounter several infrastructure challenges, providing a clear case for needing to streamline operations for greater agility.
Being a jack of all trades isn’t optimal in today’s market. It’s worth focusing on particular areas of proficiency, while excelling across multiple sectors can be advantageous. However, we should be cautious of slipping back into unprofitability after achieving substantial progress by potentially overextending.
This is of significance, and it’s a discussion Telkom must have regarding its strategy.
As we end our conversation, Mudiwa, in light of the deal, with regulatory approvals secured and a lighter balance sheet, it’s interesting to observe that the stock price hasn’t shifted much. It opened around R30, actually closer to R34, and has moved less than half a percent today.
Is this a result of a thin market during the holiday, or have markets already factored this in?
MUDIWA GAVAZA: I think it’s primarily the latter; the market seems to have integrated this into their models already. Shareholders approved the deal back in May, and in September, the Competition Tribunal also approved it, giving market participants time to respond.
Read: Telkom gains competition tribunal approval for masts and towers sale
However, regarding Telkom’s share price, it’s notable that even with slight movement today, they have been the top-performing telecom operator throughout 2024. MTN, for example, is in negative territory year-to-date, while Vodacom has fluctuated within a narrow range of 1-2%.
In contrast, Telkom has increased by 17% this year, which suggests that, at least parts of the market, are recognizing their advancements.
JIMMY MOYAHA: Exactly. A large portion of that gain for Telkom occurred in November when they surged about 25%. The market reacted positively to their developments, particularly following their recent financial results.
It’s been a significant time since their share price exceeded R30, and it’s encouraging to see it at that level.
Let’s conclude our discussion here. Mudiwa, thank you for your time and insights, as always. Mudiwa Gavaza joined me to talk about the Telkom deal—finally obtaining regulatory approval from Icasa to proceed with the sale of the Swiftnet division.
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