Telkom Receives Approval for R6.7 Billion Tower Sale

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JIMMY MOYAHA: This agreement has been under consideration for around three years. It has encountered multiple delays, including regulatory hurdles, but those have now been navigated successfully. Icasa, the Independent Communications Authority of South Africa, has approved the sale of Telkom’s masts and towers business, Swiftnet, through a R6.75 billion deal.

I’m joined by technology analyst and journalist from Business Day, Mudiwa Gavaza, to delve deeper into this and analyze the agreement. Good evening, Mudiwa. It’s always a pleasure to have you.

The last time we discussed this agreement was over coffee, pondering whether it would proceed. We had various perspectives on the buyer’s preparedness and the likelihood of receiving approval, and now it appears progress is finally underway.

MUDIWA GAVAZA: Indeed, we are moving ahead, and Telkom will finally be able to clear this business from its financial records.

This deal has been in preparation for roughly five years.

As you mentioned earlier, the negotiation process has been convoluted, yet they have successfully reached an agreement, albeit at a significantly lower value than originally proposed.

JIMMY MOYAHA: Mudiwa, what implications does this hold for Telkom? They are offloading 4,000 towers and masts from the Swiftnet division; thus, they will receive some revenue. What’s the next course of action?

MUDIWA GAVAZA: Several aspects are influencing this situation. We must recognize that market dynamics have changed considerably since 2019 when Telkom, led by Sipho Maseko, first indicated a desire to sell.

At that time, the valuation was projected to be around R13 billion. It’s worth recalling that Telkom had halted dividends and accumulated substantial debt due to infrastructure investments, making this transaction vital for alleviating that debt and enhancing cash flow.

The reasoning remains valid, albeit with a significantly diminished valuation now.

Initially valued at R13 billion, it decreased to R10 billion, then below that, culminating in the current R6.75 billion.

The expectation is that these funds will be primarily allocated to repaying debt.

We recently spoke to their CEO, Serame Taukobong, who expressed contentment with the group’s debt ratio, which has improved from above 1.8 times to about 1.2/1.3 times, and may decrease further with this transaction.

Furthermore, they will prioritize capital investments (capex) to broaden mobile network coverage in high-demand regions and improve fiber connectivity where it is essential.

JIMMY MOYAHA: Mudiwa, the company will have to navigate challenging decisions in this new environment, especially considering that their strategy will diverge notably from previous plans. What remains of the organization post-transaction?

MUDIWA GAVAZA: Post-transaction, three core divisions will remain.

Telkom will keep its Consumer division, mainly Telkom Mobile, the systems integrator BCX, and Openserve, focused on fiber infrastructure.

Previously, Telkom operated around five divisions until the divestiture of Swiftnet and its property business, Gyro, which has also undergone significant reductions. They are now left with a mobile operations division, a fiber infrastructure unit, and a systems integrator.

The company’s strategy reveals that all their services will depend on fiber infrastructure, allowing them to be the largest fiber network operator in the nation and competitively positioned against rivals.

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Entering the marketplace, they have a mobile service backed by fiber since many capital investments by competitors like Vodacom and MTN involve ‘fiber backhaul’ that connects tower infrastructure to core networks.

Given Telkom’s earlier investments, they will likely have lower capex rates compared to others. If Serame’s assertions hold true, they are also managing increased data loads and distributing their capex more efficiently.

JIMMY MOYAHA: In the telecommunications field, we have debated positioning. Should the focus be on being a technology provider or an infrastructure provider? By selling Swiftnet, Telkom seems to aim to ease the infrastructure load on its balance sheet. Other telecommunications companies have chosen the MVNO route, preferring to harness external infrastructure.

How can we lower fiber costs, considering Openserve and Telkom are in a favorable position to achieve that while remaining profitable?

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

Understanding Telkom’s market standing is likely what keeps Serame’s team vigilant at night.

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Should they be assessed like a traditional fixed-line operator when their legacy business represents only 20% of operations? Should they be regarded as a fiber network provider or as a mobile operator considering their rapid expansion?

For example, Vodacom is primarily evaluated as a mobile operator, despite having broader fiber ambitions with partners like Remgro and Maziv.

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Telkom operates as a mobile service provider but also covers numerous segments that significantly contribute to their revenue.

From my viewpoint, they need to better inform the market about their business model and the factors that drive their revenue and profitability. The efficiencies we discussed earlier, where mobile and infrastructure operations rely on the established fiber network, need clearer communication.

If you evaluate them merely as a mobile provider, they might seem to lack behind; similarly, judging them based on any individual segment may uncover weaknesses in profits or capex expenditures.

Clear communication is essential.

Moreover, analysts may require a blended approach when assessing Telkom, as their BCX unit competes with companies like Altron and EOH, while Telkom Mobile faces off against MTN and Vodacom, and their fiber segment goes head-to-head with Vumatel and MetroFibre.

Read: Data-driven approach powers Telkom’s HY growth

To me, an integrated assessment is critical moving forward. Whether market participants will adopt this remains to be seen. You often analyze these trends; what’s your perspective?

JIMMY MOYAHA: [Chuckling] Well, we’ve tackled many significant issues. I’d like to reiterate that they are still at least partly a state-owned enterprise (SOE). We haven’t even touched upon that aspect. They face ongoing infrastructure challenges; it clearly illustrates the need to enhance operations to increase agility.

Being a jack of all trades is not optimal in this landscape. It is better to concentrate on specific areas of expertise; becoming proficient across multiple sectors is beneficial. However, we don’t want to risk slipping back into unprofitability after making considerable strides by overextending ourselves.

This is vital, and it is a conversation Telkom must engage in regarding their strategic direction.

As we wrap up, Mudiwa, reflecting on the deal, with regulatory approvals in place and a lighter balance sheet, it’s noteworthy that the stock price hasn’t experienced substantial fluctuations. It opened around R30, actually hovering near R34, and has varied less than half a percent today.

Is this due to a thin market during the holiday, or have the markets already factored this in?

MUDIWA GAVAZA: I would argue it’s mainly the latter; it seems the market has already incorporated this into their models. Shareholders approved the deal back in May, and in September the Competition Tribunal also gave it the green light, meaning market players had ample time to respond.

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

However, regarding Telkom’s stock performance, it’s significant to note that despite the slight movement today, they have been the top-performing telecommunications operator throughout 2024. MTN, for example, has faced negative returns year-to-date, while Vodacom has fluctuated within a narrow 1-2% range.

In contrast, Telkom has risen by 17% this year, indicating that at least segments of the market are acknowledging their improvements.

JIMMY MOYAHA: Absolutely. A considerable portion of that increase for Telkom occurred in November when their share price surged nearly 25%. The market reacted positively to their developments, particularly following the release of their recent performance metrics.

It’s been quite some time since their share price exceeded R30, and it’s encouraging to witness it there now.

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

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