As Sipho Maseko gears up to buy a substantial stake and inject much-needed cash into an ailing Telkom, questions have been raised about whether his plan for a turnaround or unlocking value from the group’s sprawling structure is sound.
For now, market and industry players agree that there is huge value in telecom infrastructure, like fibre and cellphone towers. One analyst says a big risk still remains of whether such value can be unlocked given the state of Telkom’s business.
Last week, Business Day reported the group of investors led by Maseko, former CEO of Telkom, had amassed a war chest of about R12bn for its bid to take up equity in the state-affiliated group.
This is after Maseko sold a vision that includes unlocking value by combining Telkom’s physical telecom assets — fibre and cellphone towers — with those of Mauritius-based Axian Telecom to create a pan-African infrastructure company.
Telkom — operating only in SA — has close to 4,000 towers, while Axian — operating in nine countries — has 3,343. Telkom has more than 170,000km of fibre, with Axian having close to 10,000km. Both companies are said to have seven data centres.
Mergence portfolio manager Peter Takaendesa warns that the executing will not come easy if Maseko is to succeed.
“It’s difficult to fully assess the speculated transaction and its prospects without full information on how structural challenges at Telkom will be addressed by any such proposals.”
“Sipho knows the business very well and is a very experienced businessman, but the structural and competitive challenges facing Telkom should not be underestimated particularly in the challenging current macroeconomic environment.”
As voice revenue and data margins fall, squeezed by public pressure and regulations, telecom operators have been investigating other ways to create revenue streams from their large customer bases.
While financial services has done well for companies like Vodacom and MTN in that regard, infrastructure has come up as another driver for growth.
The idea is that as internet consumption continues to increase, there needs to be physical fibre, towers, data centres and other such infrastructure in place to carry the growing volumes of traffic. But these assets come at a huge cost.
For example, Remgro said capital expenditure at Community Investment Venture Holdings (CIVH) — which operates Vumatel and Dark Fibre Africa — amounted to R2bn in the six months to end-December 2023. For a number of years, Vodacom and MTN spent about R10bn each to expand their mobile networks in SA.
As such, the move towards more sharing of network resources has grown, allowing new and existing operators to enter or expand their place in the market with large capital costs. This has created an opportunity for infrastructure companies to flourish, which is what Maseko is looking to capitalise on, given Telkom’s place as one of the largest fibre network operators [FNOs] on the continent.
Rival MTN has also bet big on infrastructure, racing to expand its fibre network to 135,000km in Africa, while Vodacom has created its own separate tower company, similar to Telkom’s Swiftnet.
Telecoms infrastructure is enjoying growing interest from the investment community and financial institutions, particularly fibre.
The International Finance Corporation (IFC) has recently backed Seacom with a $260m loan and also put $250m of equity and debt investments in Strive Masiyiwa’s Liquid.
In SA, fibre network operator Metrofibre secured R5bn in funding in July 2022 from Standard Bank, while Western Cape-based Octotel secured R2bn in financing from RMB to boost its network rollout.
What is clear is that consolidation — combining various asset portfolios to create industry giants — is happening and is a trend likely to remain for the foreseeable future, led — in part — by Vodacom and CIVH’s R13bn fibre tie up, announced back in November 2021.
“Our view is this that this market is ripe and will definitely consolidate on a number of levels,” MTN SA CEO Charles Molapisi said during the group’s Capital Markets Day on Thursday.
‘Network of networks’
“This market will consolidate at the ISP [internet service provider] layer. Definitely there are two main ISPs ... they will definitely consolidate and it’s happening now. This market is going to consolidate at the FNO level and it’s also going to consolidate in terms of infrastructure, in terms of the number of MNO’s [mobile network operators] that can provide infrastructure.”
“And that’s why we’re positioning ourselves as a network of networks.”
Cell C recently decided to use MTN’s physical mobile network to offer its services, taking the cost of building and running its own towers. At the same time, Telkom uses MTN and Vodacom’s network in places where it does not have its own coverage.
“The Telkom story remains one of valuable infrastructure assets that are currently not generating enough operational cash returns for shareholders and the balance sheet is likely to continue to deteriorate if the group remains on its current path,” says Takaendesa.
“In a nutshell, our view is that for investors that can navigate challenging stakeholder issues at Telkom and execute on the unlock value from its assets, there is significant value on the table although that comes with high execution risks.”
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