After choosing to put the brakes on former CEO Sipho Maseko’s plan to take a big chunk of Telkom, attention will shift to the group’s management to execute on a plan to unlock value trapped in its sprawling, once monopolistic structure.
In June, Telkom confirmed it had received an unsolicited offer led by Maseko, the Public Investment Corporation (PIC) and Mauritius-based telecom company Axian Telecom to buy a substantial stake in the partly state-owned telecom firm.
Earlier in July, Telkom — now valued at R14.67bn — rejected the bid, saying its board of directors felt the proposal was not in the best interest of shareholders.
Telkom CEO Serame Taukobong has stood firm in recent months in the company’s stance that it does not need “a knight in shining armour”, in an indication that he did not see the offer as appealing.
While Maseko has ruled out a hostile takeover, he has not ruled out appetite for the deal, telling Business Times: “Ultimately, if shareholders think this is a good idea, we are still here. If they want us to come back, they will call us.”
The failure of the consortium’s bid joins the list of many other credible transactions that have been presented to Telkom before and failed, notes Peter Takaendesa, head of equities at Mergence Investment Managers.
“As with any other acquisition transaction, getting value alignment and the full support of the key stakeholders is key, especially where there is a large existing shareholder and the acquirer needs control of the target company to unlock value,” Takaendesa said.
In the past year, MTN tried to acquire 100% of Telkom for R30bn, Rain proposed a merger with the fixed-line operator, while Toto offered to take a piece of the government stake in the company.
Maseko had done the one thing which other bidders have so far not done: getting public support from important shareholders like the PIC. The PIC, on behalf of the Government Employees Pension Fund, makes up one part of the state’s control over Telkom with its 15% stake. The government directly holds another 41%.
“Both Telkom and the consortium have strong arguments of their own and we believe those are credible arguments if execution on the value unlock plans or strategies was guaranteed. Telkom is right that the sum of the parts valuation of the group is now more than the offer proposed by the consortium, provided Telkom management can efficiently execute on the sum of parts value unlock plans,” Takaendesa said.
In 2019, when Maseko was still CEO at Telkom, he devised a plan that would close the value gap between its share price and the sum of its parts, made up of SA’s third largest mobile business, the country’s largest fibre operator Openserve, its technology unit BCX, properties under Gyro, and tower division Swiftnet.
At the time, he estimated these assets to be worth R53bn.
Without a deal, it means Taukobong and his team have to work to realise this value.
Telkom shares are currently sitting at R28.70. After recent write-offs, the group’s assets are estimated to now be worth about R40bn.
Maseko’s consortium offered R46 a share to long-suffering shareholders, a 60% premium.
Irnest Kaplan of Kaplan Equity Analysts said Telkom is unlikely to budge.
“At the recent Telkom results, management made it quite clear they wouldn’t entertain a deal if they thought the bidding consortium didn’t have the money to execute on it. They didn’t explicitly refer to Maseko’s consortium bid, but I think it was implied. At least that’s how it came across to me,” he said.
Telkom shares have fallen almost a tenth since the group released its latest earnings report, indicating at the time that “the board is not at a level of comfort in certainty provided by the consortium”.
In its rejection, the group stated that it was unclear that Maseko’s strategy, for which the consortium has amassed R12bn, would work. The group is also not convinced that the consortium can fund its bid and is not happy with the price offered.
The consortium has since hit back saying it was never given an opportunity to make its case to management or shareholders, and address the concerns raised.
“The consortium also has valid concerns factored into its offer price, such as the additional investment that may be required to sustainably turn around Telkom’s investment case. They are also naturally incentivised to make sure they build a margin of safety in their offer to Telkom just in case execution on the turnaround plans proves challenging afterwards,” Takaendesa said.
With that in mind, this bid could be on the agenda for some shareholders willing to at least hear out Maseko’s proposal at Telkom’s AGM on August 24.
After taking into account all the various factors, Takaendesa’s view is “there is still room for all stakeholders to engage further and find a solution that best aligns interest and the sharing of the value that may be created by any proposed transactions”.
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