It is hard not to see the rejection by Telkom’s board of an offer from a group of investors led by former CEO Sipho Maseko as a missed opportunity for leaders to tick a key performance indicator box.
Maseko joined forces with the Public Investment Corporation (PIC) and Mauritius-based Axian Telecom to bid a rumoured R46 per share for at least a 35% stake in the company and a sound strategy to combine Telkom’s fibre, cellphone towers and data centre assets with those of Axian to create a pan-African telecom infrastructure group with a sustainable financial future.
The potential tie-up had investors’ backing if the share price is anything to go by. Telkom shares picked up 10.5% to R27.96 when the news broke in late May, adding about R1.5bn to the company’s market cap.
But Telkom’s board snubbed the bid, saying it is not in the best interest of shareholders and that its own strategy would create more value. Yet shareholders don’t buy it, judging by the share price reaction since Friday. They see this decision for what it is: a short-sighted and arrogant stance that disregards the potential benefits of the consortium’s proposals and the track record of Maseko, an instrumental figure in turning around Telkom’s fortunes during his eight-year tenure as CEO.
He transformed Telkom into a modern telecom contender in his time at the helm, challenging the dominance of MTN and Vodacom, which seemed unbreakable when Telkom entered the mobile phone market in 2010. He pushed through a punishing but necessary cost-cutting strategy when the government, its main shareholder, undermined sound and prudent business practices, slashing its inflated workforce by half from 22,000 in 2013. Under his stewardship, Telkom’s investor equity soared, outshining MTN and Vodacom.
Still, the company’s market value then — more than R22bn — did not fully capture these gains, or the worth of the company’s components. Before he left, Maseko thus set the ball in motion to release value trapped in the company’s sprawling structure. He assured investors in 2020 that the company would soon split and list its masts and towers — telecom infrastructure that emits wireless signals and is seen as a neighbourhood nuisance — business.
Repay faith
It would have been a valuable parting gift to shareholders who stood by his side when he pulled growth targets amid the pandemic and suspended dividend payouts for three years. These investors waited and waited for the new leadership to show a strong sense of purpose that they are committed to tackling the gap between the company’s shares and the sum of its parts.
But as the March 2022 deadline to announce the break-up of Telkom and release up to R13bn in value drew closer, Telkom said the plan had been shelved after Russia’s invasion of Ukraine and subsequent Western sanctions dampened investor appetite for equities, let alone new initial public offerings.
Depending on who you speak to, Maseko’s subsequent attempt to buy a stake in Telkom with the backing of the PIC and Axian was an attempt to finish what he had started and repay shareholders’ faith in him. The consortium hoped to conduct a friendly transaction with Telkom’s board, but they were met with resistance and hostility. They were not given a chance to present their case or to negotiate a price and terms. They were also denied access to information that could lead to firm financing. And they were accused of lacking clarity and certainty in their proposal.
This is unfair. The consortium had presented a clear, compelling case for their offer, which would have unlocked value for Telkom’s shareholders and injected much-needed cash into the company. They had also secured letters from banks backing their bid and had raised about R12bn for the deal, with Axian contributing more than R9bn ($500m) and Maseko’s investment firm, Afrifund, the rest.
Telkom’s rejection of the offer is not only a snub to Maseko and his partners but also a missed opportunity for the company and the country. By partnering with Axian, Telkom could have used its assets and expertise to access new markets and opportunities across Africa.
Instead, Telkom has chosen to stick to its own strategy, which is unlikely to yield better value for shareholders or to challenge the dominance of MTN and Vodacom. A cursory glance at its latest earnings reports paints a picture of a company that seems to have reached the ceiling in winning a substantially bigger share in the mobile phone market.
Regulatory failure
Telkom is backed into a corner. It is trawling its coffers for cash to make up for the skyrocketing cost of doing business in a load-shedding environment in which competition is fierce, sales sluggish and debt-laden consumers are stalling in paying their phone bills.
It may be hard to accept but the truth is that Telkom’s position in the top tier of SA’s mobile phone industry is due to the government’s delay of more than a decade in allocating radio frequency spectrum. Due to this regulatory failure, Telkom, unhindered by the spectrum shortage, offered low-cost broadband deals as incumbents kept prices relatively high to recover the cost of repurposing frequency bands used for voice calls to handle soaring internet connectivity demand.
The allocation of new radio frequency spectrum has altered the environment, exposing Telkom’s weak position to offer cut-price broadband deals lest it start a war it can’t win with deep-pocketed, supremely more profitable rivals.
Telkom’s stance tests Maseko’s determination to create a pan-African telecom champion. He will surely find another way to make it happen.
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