https://iframe.iono.fm/e/1513046″ width=”100%” height=”126″ frameborder=”0

You can also listen to this podcast on iono.fm here.

JIMMY MOYAHA: This agreement has been under discussion for nearly three years. It has encountered multiple delays, including required regulatory approvals, but it has finally managed to advance. Icasa, the Independent Communications Authority of South Africa, has given the green light for the sale of Telkom’s masts and towers business, Swiftnet, in a deal valued at R6.75 billion.

I’m speaking with tech analyst and journalist from Business Day, Mudiwa Gavaza, to delve deeper into this topic and analyze the deal. Good evening, Mudiwa. It’s always great to have you with us.

The last time we discussed this deal was over a cup of coffee, where we pondered whether it would ever come to fruition. We held various views on the readiness of the buyer and the likelihood of getting approvals, and now it appears we are finally making headway.

MUDIWA GAVAZA: Indeed, we are moving ahead, and Telkom will ultimately be able to eliminate this business from its balance sheet.

They have been pursuing this deal for approximately five years.

As you mentioned earlier, the process has had its ups and downs, but they’ve successfully navigated it, albeit at a markedly reduced value compared to what was initially on the table.

JIMMY MOYAHA: Mudiwa, what implications does this have for Telkom? With the exit of 4,000 towers and masts from the Swiftnet division, they will generate some revenue. What comes next?

MUDIWA GAVAZA: There are several elements to consider. It’s important to recognize that market conditions significantly differ from 2019 when Telkom, led by Sipho Maseko, first announced plans to sell.

At that time, the valuation was approximated at R13 billion. Many will remember that Telkom had halted dividends and accumulated substantial debt for infrastructure projects, making this sale critical for alleviating that debt burden and enhancing cash flow.

That reasoning still stands, but the current value is much less.

The original valuation was R13 billion, which declined to R10 billion, then below R10 billion, culminating in the present R6.75 billion.

The expectation is that the proceeds will primarily be allocated to debt repayment.

We recently had a discussion with their CEO, Serame Taukobong, who indicated satisfaction with the group’s debt ratio, which has improved from over 1.8 times to approximately 1.2/1.3 times, potentially decreasing further with this transaction.

Moreover, they plan to invest in capital expenditures (capex) aimed at enhancing mobile network coverage in demand areas and improving fiber connectivity where necessary.

JIMMY MOYAHA: Mudiwa, given the changing landscape, the company faces tough decisions, knowing that their strategy will be quite distinct from their original plans. What remains of the organization after this transaction?

MUDIWA GAVAZA: Following the transaction, three main divisions will remain.

Telkom will retain its Consumer division, which largely encompasses Telkom Mobile, the systems integrator BCX, and Openserve, focused on fiber.

Previously, Telkom operated around five divisions until the sale of Swiftnet and their property business, Gyro, which have also seen major divestments. Now, they are left with a mobile business, a fiber infrastructure unit, and a systems integrator.

The company’s strategy suggests that all their services will rely on fiber infrastructure, positioning them as the largest fiber network operator in the country, aiming to compete effectively with their rivals.

Read:

As they enter the market, they will have a mobile business bolstered by fiber, since a lot of the capital investments made by competitors like Vodacom and MTN rely on ‘fiber backhaul’ linking tower infrastructure to core networks.

Given Telkom’s previous investments, they can maintain lower capex rates compared to others. If Serame’s assertions are correct, they are also managing greater data volumes and allocating their capex more efficiently.

JIMMY MOYAHA: In the telecommunications sector, we’ve had ongoing debates about positioning. Should you lean towards being a tech provider or an infrastructure provider? Telkom’s sale of Swiftnet is likely intended to lessen the infrastructure load on its balance sheet. Other telcos have opted for the MVNO route, preferring to utilize external infrastructure.

How can we lower fiber costs, especially when Openserve and Telkom are well-positioned to do so while maintaining profitability?

MUDIWA GAVAZA: Jimmy, that’s a vital consideration.

Recognizing Telkom’s market position is likely a key concern for Serame and his team.

ADVERTISEMENT:

CONTINUE READING BELOW

Should they be evaluated as a traditional fixed-line operator when their legacy business constitutes only 20% of their operations? Should they be viewed as a fiber network operator or a mobile provider given their rapid growth?

For instance, Vodacom is primarily regarded as a mobile operator, despite their broader ambitions in fiber with partners like Remgro and Maziv.

Listen/Read:
Minister appeals block of R13.2bn Vodacom deal
Tribunal’s Maziv decision ‘a travesty for SA’ – Vodacom boss
EFF condemns minister for interference in Vodacom-Maziv merger case

Telkom functions as a mobile provider, but it also includes various segments that make up a significant portion of their revenue.

From my viewpoint, they must educate the market about their business model and the key drivers of revenue and profitability. The efficiencies we touched on earlier, which see mobile and infrastructure operations dependent on the established fiber network, need clearer articulation.

If you assess them solely as a mobile operator, they might seem to lag; similarly, judging them based on any single segment may reveal shortcomings in profits or capex investments.

Effective communication is essential.

Furthermore, analysts may require a blended approach for evaluating Telkom, as their BCX segment competes with companies like Altron and EOH, while Telkom Mobile faces off 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 evaluation is vital going forward. Whether the market participants will adopt this remains to be seen. You often analyze these trends; what’s your opinion?

JIMMY MOYAHA: [Chuckling] Well, we’ve discussed many issues. I’d like to highlight that they still remain at least partly a state-owned enterprise (SOE). We haven’t even delved into that dimension. They are confronting various infrastructure hurdles, and it’s a clear example of the need to streamline operations for greater agility.

Being a jack of all trades may not be the best strategy in this landscape. Focusing on specific areas of expertise is essential, and achieving proficiency in multiple sectors is advantageous. However, we must avoid the pitfall of returning to unprofitability after making significant progress by overextending ourselves.

This is crucial, and it’s a conversation that Telkom needs to engage in regarding their strategy.

As we wrap this up, Mudiwa, reflecting on the deal with all regulatory approvals completed and a streamlined balance sheet, it’s interesting to note that the stock price hasn’t shifted much. It opened around R30, actually closer to R34, and has fluctuated less than half a percent today.

Is this due to a thin market with the holidays, or have investors already priced this in?

MUDIWA GAVAZA: I think it’s primarily the latter; it seems the market has already incorporated this into their models. Shareholders gave their approval for the deal back in May, and it received the green light from the Competition Tribunal in September, meaning market players had adequate time to respond.

Read: Telkom gains competition tribunal approval for masts and towers sale

However, concerning Telkom’s share price, it’s notable that, despite negligible movement today, they have been the leading telecom operator performance-wise throughout 2024. MTN, for instance, has faced negative performance year-to-date, while Vodacom has remained within a narrow 1-2% band.

In contrast, Telkom has risen 17% this year, indicating that segments of the market are recognizing their progress.

JIMMY MOYAHA: Absolutely. A significant portion of that increase for Telkom occurred in November when they surged around 25%. The market positively reacted to their developments, particularly following the release of their latest figures.

It’s been quite a while since their share price exceeded R30, and it’s uplifting to see it at this level.

Let’s conclude our discussion here. Mudiwa, thank you for your time and valuable insights, as always. Mudiwa Gavaza joined me to analyze the Telkom deal – which has finally received regulatory approval from Icasa to proceed with the sale of the Swiftnet division.

Follow Moneyweb for in-depth finance and business news on WhatsApp here.