Taking SA backwards

SA's fixed-line operator, Telkom, needs a strong investment partner to give it access to new technologies and provide fresh thinking.

Government has to recognise this and stop trying to hang onto its 38% stake because of thinking that is reminiscent of the bad old days. Binning the deal between Telkom and KT Corporation was the wrong move, for all the wrong reasons.

Granted, Telkom is a strategic national asset, it has thousands of kilometres of copper in the ground and a telecoms infrastructure second to none.

However, the company has been battling for years, with falling fixed-line penetration, increased competition from mobile operators and Neotel, as well as pressure on its traditional revenue streams.

Telkom's woes are linked to the fact that it just has not moved fast enough in a sector that changes rapidly. The ship is too large and cumbersome to steer in a new direction with any amount of speed.

The operator has rested on its laurels because of a mindset that harks back to when it was the only option in town. For too many years, Telkom had a monopoly on telephone calls around the country and to overseas destinations, and owned the only undersea cable that connected South Africans to the rest of the world.

The ship is too large and cumbersome to steer in a new direction with any amount of speed.

Nicola Mawson

Because it controlled communication, there was never a need for it to worry about service delivery, competitive pricing and innovative technology. Then liberalisation arrived, and Telkom was too slow to react.

Telkom came into being in 1878, when the first telephone service was launched in SA. By 1970, there were a million telephone lines in the country as the state entity entrenched its position.

Until 1991, Telkom formed part of the Department of Posts and Telecommunications, and was then spun out as a separate entity.

Then, in 1994, the world opened up when government decided to allow mobile telephony into the country, and it quickly grew to the point where many South Africans have more than one SIM card. Cellphones were a blessing for people in remote areas, who had previously battled to connect to the outside world.

Yet, Telkom still did not worry about the increasing competition, until recently, when it realised it had to get its act together because mobile penetration is starting to eat into its revenue stream.

Telkom has admitted it must diversify revenue streams, push broadband penetration - one of government's key goals - and drive towards full convergence. The operator recognises this, but it is doubtful that Telkom can do this on its own.

In the first half of the year, CEO Nombulelo “Pinky” Moholi pointed out that its traditional fixed-line market is shrinking, line losses are mounting and operators are increasingly self-provisioning, negatively impacting wholesale revenue. Lower termination rates have also hurt revenue streams.

Telkom knows it has to make a significant step change in its strategy to defend its shrinking market share, and grow income and its business. It has put a five-year plan into place that focuses on broadband, convergence, mobile and value-added ICT services.

Government knows it is vital that Telkom gets it right.

The Department of Communications has said in a statement that it “recognises the need for Telkom to implement an urgent turnaround strategy and to get the company back on its critical centre of delivering ICT services to all South Africans”.

This is why it makes no sense that it would bin the proposed deal between Telkom and KT, apparently not liking something about the structure.

Perhaps the state thinks the 20% stake is worth far more than the R25.60 a share KT Corporation was prepared to pay; investors seem to disagree.

Telkom's share price is cheap - it has a price-to-equity ratio of 6.08, compared with Vodacom's 14.11, which is ironic, considering that it used to own a rather large piece of the cellular company.

Clearly, if a company is prepared to pay a premium on the price and will provide innovation that can get Telkom out of the rut it is in, that can only be good.

But Telkom would have to issue more shares to facilitate the deal - and that would dilute government's stake. Therein lies the rub.

I suspect that any new deal may well involve Telkom shareholders selling some of their stock - shareholders other than government. That way, the state can keep its stranglehold. Telkom and the department will meet to look at other options, and there should be more clarity in about three months.

However, whatever the final outcome is, government is being short-sighted by hanging onto its stake. Government is suffocating Telkom's bid to move forward, and harming the country in the process.

KT has done wonders for penetration in Korea and could impart those skills to Telkom, which would speed up the process of getting broadband to all. Binning the deal just to stay in control means that fixed-line penetration will continue to fall; and that will not help with the broadband push.