Telkom is expected to sell its 50% stake in cellular network operator Vodacom. However, it is far from certain that it will sell its whole fixed-line business to MTN, say industry observers.
Yesterday, Telkom issued a cautionary announcement stating it is in talks with the Vodafone Group (which owns 50% of Vodacom) and MTN Group. The talks could have a material impact on its share prices, it warned.
MTN also issued a cautionary, stating the talks "may or may not result in a transaction involving certain assets of Telkom".
Speculation has been rife that, should Telkom sell its Vodacom stake, as well as its fixed-line business, government's influence would be greatly reduced in the local telecommunications sector. However, a senior government source says the state has been aware that such discussions are under way, but no firm position has been taken yet.
Government is a majority shareholder in Telkom, owning 52% of Telkom's shares - 38% direct ownership and the rest held through the Public Investment Corporation (PIC). PIC also owns about 16% of MTN's total shares.
"The problem is that should a deal be done, it won't necessarily mean that telecoms prices will come down or that it will increase accessibility. However, government also has to consider its role as a shareholder of Telkom and consider the wishes of the other shareholders," says the government source.
The source says government will probably wait for Telkom, MTN and Vodacom to make a final proposal before making a decision.
BMI-TechKnowledge senior analyst Richard Hurst and MyADSL founder Rudolph Muller argue that it does not make sense for government to sell its Telkom assets.
"It would have been better for government to sell off the Infraco assets to Neotel, if it truly wants to reduce its presence in the telecoms markets," says Hurst.
Possible permutations
Steve Minnaar, a portfolio manager at Old Mutual Asset Managers, says the intense speculation and number of permutations around the possible outcome of such a transaction make it almost impossible to predict the impact.
"It has been known for some time that Telkom and Vodacom wanted to split. This has become more apparent since the Venfin deal of two years ago, giving [UK-based group] Vodafone an equal share with Telkom in Vodacom," he says.
MarketWorks business advisor Steve Edwards says Telkom is driven to reinvent itself one way or another, as the competition authority prevented the logical option of acquiring a local ICT asset.
"In its present form, Telkom's viability as a business is in jeopardy and can be sustained for no more than a few degenerative years."
Organic growth in the ICT/converged arena is not an option, given the new competitiveness of the telecoms landscape and the dire shortage of critical skills. If it cannot grow by appropriate acquisition, its best option may be to be bought, he adds.
Competition issues
Minnaar says there is also a question as to whether the competition authorities would allow such a deal to go through, as it may be seen as moving a monopoly situation from Telkom to MTN.
"The irony is that, in its determination to prevent the previous monopolist from maintaining its market dominance, the competition authority may just have created a different kind of monster," says Edwards.
Frost & Sullivan senior ICT analyst Corrie Froehlich says acquiring sites or the right to lay optic fibre cables is the biggest challenge MTN faces. "Should MTN acquire an already-established infrastructure, this will greatly speed up the process and define the costs."
MTN recently announced plans to roll-out fixed-line infrastructure.
"It may make sense for MTN to buy the business and then hive off parts of it that may be considered anti-competitive. This may mean MTN keeping, say, the wholesale business and then outsourcing the fixed-line business," says Minnaar.
A telecoms analyst at a merchant bank says the SENS announcement was really prompted by press reports.
"It would have been impossible for the parties to have continued to not comment on the possibility of talks, but these talks are definitely at an early stage," he says.
MTN's senior members are out of the country on a roadshow, following its year-end results. Both Minnaar and the analyst say that if the talks were close to being fruitful, then the executives would be in the country.
Vodacom has refused to comment and a spokesman says it is a shareholder issue.
The announcements caused Telkom's share price to surge by more than 8%. However, it settled back to R189 by mid-morning today, a drop of 199c, or 1.4%. MTN extended its losses from yesterday, falling 1.87%, or 198c, to R104.20.
"The share trading patterns are not unusual for a period of heavy speculation on corporate activity between two large groups. And it [the speculation] will probably continue until more clarity is seen," a share dealer says.
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