Telkom has confirmed that a consortium, which includes Mvelaphanda Holdings and affiliated funds of Och-Ziff Capital Management Group, is making a bid to buy the entire fixed-line operator.
Telkom published a cautionary on the JSE news service this morning, saying it received a letter from the consortium on Friday, stating its intention to make an offer for the entire issued share capital of Telkom.
The telco's cautionary does not state the value of the potential offer. However, media reports indicate Mvelaphanda would pay R90 billion for the entire share issue. This exceeds Telkom's market capitalisation of R73 billion as at the close of market on Friday.
According to Telkom, the letter makes it clear the offer will only be made if Telkom meets a number of pre-conditions. These include confirmation by the Telkom board that it will unbundle Telkom's entire 50% stake in Vodacom, SA's largest mobile operator, it said.
Telkom said it also received a non-binding proposal from a wholly-owned subsidiary of Vodafone Group to acquire a portion of Telkom's stake in Vodacom.
The fixed-line operator is careful to point out that discussions with Vodafone began on 14 May 2008 and are independent from the approach from the Mvelaphanda consortium.
"The board of Telkom, in accordance with its fiduciary duties, will evaluate all bona fide offers with a view to maximising shareholder value. No transaction will be entered into without requisite shareholder approvals," it said.
The company will advise shareholders of further developments in this regard in due course, it noted.
Earlier this year, Telkom CEO Reuben September said the disposal of Telkom, or any of its investments, would only be considered if a "compelling strategic rationale" supports the decision.
September said the Telkom board was not closing the door to potential suitors, but had a clear idea of the value it sought.
Hard sell
Government, which is Telkom's major shareholder, was unable to respond to a media query by the time of publication. Government holds 39.42% of Telkom shares directly, with 13.05% of shares held through the Public Investment Corporation.
However, a former Department of Communications employee, who asked not to be named, said it was unlikely that government would sell its stake.
"At the moment, there is a big change in government economic policy and so it is very hesitant to make any sales such as this," the person said.
BMI-TechKnowledge MD Denis Smit agrees with the former employee: "I don't think the Zuma camp will favour this at all. Labour/Cosatu won't, so I think it will be a hard sell."
The new economic debate is pointing towards nationalisation, says Smit. Public enterprise minister Alec Erwin has already submitted draft policies showing plans for greater government involvement with state-owned entities, he says.
Good for the market
Frost & Sullivan analyst Lindsey MacDonald says the news comes as no surprise, as there have been ongoing discussions about what government will do with its 54% (direct and indirect) Telkom stake.
"In the longer term, it would be good for the market if government had to exit Telkom completely; however, with the 2010 Soccer World Cup on the horizon and the importance of the undersea cables, it may be good for government to keep its finger on the pulse of developments in this area," she says.
IDC analyst Richard Hurst notes the ICT industry would definitely approve of a completely privatised incumbent telecoms entity. Such an entity would be driven by profit and market efficiency, he says.
"However, such an entity may be tempted to cherry-pick certain market segments and ignore others which may be at odds with government policy and developmental objectives."
In addition, the regulatory environment would need to be sound to allow competition to flourish, he notes.
Taking control
Daniel Malan, an analyst at asset management firm Regarding: Capital Management, says the market knew for some time that Telkom wanted to unbundle its Vodacom stake.
The fact that Vodacom is a partnership means Telkom has never had control of the full cash flows and this makes it difficult for planning and extending the business, he says.
"Depending on what the exact agreements are, Vodacom is limited by Vodafone over which markets it can enter. It is easy to slice up the SA market, but one has to build up the company so it can enter other markets if necessary."
Malan says Telkom will have to ensure some kind of back-to-deal is structured so that it can remain in the burgeoning cellular market.
"Telkom will not be able to continue as a fixed-line player only. The world is not moving that way. It will have to have a mobile operation and to build one up from scratch will be too expensive. So some kind of deal will probably have to be made with MTN or Cell C," he says.
Andile Ngcaba, chairman of Dimension Data SA, whose Elephant Consortium secured a 10.1% stake in Telkom in May 2005, for R6.6 billion, has refused to comment.
Telkom shares were trading at R150 this morning, a surge of 9.49%.
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