Fair deal – now please pay us
Institutional shareholders want at least 75% of Vodacom proceeds paid back to them
INSTITUTIONAL SHAREHOLDERS in Telkom are generally pleased at the price put on the table by Vodafone for another 15% stake in Vodacom (it already has 50%) and with the prospect of the subsequent unbundling and listing of the remaining shares on the JSE. They’re now holding thumbs that Telkom will heed their call to see the bulk of the cash – most said they wanted at least 75% of it, or nearly R16,9bn – paid back to them.
Renaissance Fund Managers’ Khulekani Dlamini says shareholders had proactively engaged Telkom’s management in that regard prior to the offer and hoped to see the fruits of that shareholder activism. “Most of us don’t trust them to deploy capital on our behalf,” says Dlamini. Although it would prefer 100% of the capital to be paid back to shareholders, Dlamini conceded that might be unrealistic.
Telkom CEO Reuben September has previously said that if it couldn’t make an investment case to best use the capital from any sale of its Vodacom stake, it would, in principle, return capital to shareholders.
Telkom finally announced the Vodafone deal had the go-ahead from its board of directors and Government – which ultimately controls the group – in a recent renewal of its long-standing cautionary announcement.
The other party that Telkom was negotiating seriously with – a Mvelaphanda-led consortium – dropped out mid-September, citing “current market conditions and pricing considerations”.
Yet a third prospective bidder – the Mowana consortium – had proposed putting Globacom’s Nigerian mobile business together with Telkom’s 50% stake in Vodacom. But although there was some behindthe-scenes excitement about that prospect, it was outweighed by scepticism about whether the group would be able to access the necessary capital; and Telkom never indicated it had entered into formal discussions with the consortium.
The Vodafone deal apparently received Government’s approval (it holds 38% and the Public Investment Corporation (PIC) has 15%) in the dying days of Thabo Mbeki’s Cabinet. It’s believed the current Mothlanthe Cabinet subsequently also gave it the thumbs up.
It was initially thought the deal would involve Vodafone possibly buying a 12,5% stake for R18,75bn but it finally offered to buy 15% for R22,5bn (the transaction is still subject to various conditions). were expecting.
Market participants are unsure of exactly how long it will take before the deal is finalised or when Vodacom would come to market. However, the approval by both its board and Government represent two hurdles already cleared.
But what of the prospects for Telkom as a stand-alone entity once the Vodacom stake has been sold? In addition to wanting to expand further up into Africa and build on the early success of its Multi-Links business in Nigeria, Telkom also plans to spend R1,7bn building a mobile network in SA.
Dlamini says what would save Telkom, isn’t the company itself, but SA’s regulatory environment, particularly if that pushes it towards the model of an unbundled group. He says Telkom’s network is a multi-layered one, with parts that can be hived off. Telkom should sell businesses that aren’t core and separate into a wholesale and retail business, although Dlamini concedes that’s not a strategy management seems willing to adopt.
Kingston says Telkom needs to think carefully about what it wants to be: a wholesale or a retail player? He says it should become a pure infrastructure player – a conduit for other operators to leverage off its network rather than trying to play in numerous different markets.
But while the jury is still out on Telkom’s strategy in SA’s fiercely competitive and mature market, its strategy to the north is potentially more attractive, due to those markets being less developed and generally posing less competition, Kingston says.
Dlamini says the price – which values Vodacom at R150bn – represents a “massive” premium in the current market and also a premium to its rating of the business.
Sanlam Investment Management’s Andrew Kingston agrees the current implied market valuation of Vodacom is at a premium; but the control premium, as represented by the offer Vodafone has proposed, is in line with what it and the market
Prefers 100% of capital. Khulekani Dlamini