The great di­vorce

It’s a good deal, say some Telkom share­hold­ers, but we wanted more cash

Finweek English Edition - - Companies & Markets -

AL­THOUGH IN­STI­TU­TIONAL In­vestors in Telkom are glad the di­vorce be­tween Vo­da­com’s and Telkom’s fixed line as­sets is fi­nally hap­pen­ing, they would’ve pre­ferred to see more of the cash paid back to them. But that’s not why its share price hasn’t re­sponded more vig­or­ously to the good news of the deal – the sale of an­other 15% stake in Vo­da­com to Voda­fone, the un­bundling of the re­main­ing 35% of Vo­da­com to Telkom’s in­vestor base and a spe­cial div­i­dend of half the cash pro­ceeds – be­ing con­sum­mated.

It has more to do with the mar­ket’s on­go­ing con­cern about whether Telkom’s man­age­ment can de­liver on its strat­egy and pro­duce re­turns on that. One in­vest­ment an­a­lyst says: “It’s no se­cret man­age­ment has lost cred­i­bil­ity with the in­vest­ment com­mu­nity.” He doubted that would change af­ter the trans­ac­tion. The only dif­fer­ence would be that the ex­tra cash would take the pres­sure off Telkom and en­able it to be more ag­gres­sive in the mar­ket.

But while in­sti­tu­tions would ideally have liked to have all the cash paid back to them, they ac­knowl­edge that wouldn’t have been a rea­son­able de­mand. Some can­vassed be­fore the deal was fi­nalised said they’d have liked any­thing be­tween 63% and 75% of the R22,5bn (less Vo­da­com’s net debt of R1,55bn). They’re be­ing of­fered 50% of the af­ter­tax (cap­i­tal gains tax) pro­ceeds.

Telkom CEO Reuben Septem­ber didn’t say (at a pre­sen­ta­tion on the day of the news) ex­actly how the State util­ity planned to spend the ad­di­tional money. How­ever, he did pro­vide some clues. Septem­ber said Telkom would ac­cel­er­ate its in­fra­struc­ture in­vest­ment – in­clud­ing the next gen­er­a­tion net­work – and would now be free to avail it­self of op­por­tu­ni­ties such as ac­qui­si­tions and strate­gic part­ner­ships with other ma­jor mo­bile play­ers or tel­cos in any mar­ket.

He also said it would use the pro­ceeds “to the ex­tent it meets our in­vest­ment cri­te­ria”. And al­though speed to mar­ket was im­por­tant (the aim was to ac­cel­er­ate its in­fra­struc­ture in­vest­ments) the cash wouldn’t burn a hole in Telkom’s pocket, he as­sured in­vestors.

We also know Telkom wants to spend around R1,7bn on the se­lec­tive build of its fixed mo­bile net­work (it will sup­ple­ment that ca­pac­ity with a roam­ing agree­ment on an­other mo­bile net­work, al­though hasn’t yet signed one) and that its por­tion for fund­ing Mul­tiLinks in Nige­ria is US$400m (al­most R4bn). In ad­di­tion, the M-Web Africa deal cost $63m (roughly R610m).

The trans­ac­tion is still sub­ject to a num­ber of con­di­tions, in­clud­ing reg­u­la­tory ap­provals and a share­hold­ers’ vote at a spe­cial gen­eral meet­ing in midMarch next year. But given that it has the sup­port of its big­gest share­hold­ers it seems un­likely to fail.

An­drew Kingston, fund man­ager at San­lam In­vest­ment Man­age­ment, says most in­sti­tu­tional share­hold­ers would have pre­ferred to see more of the cash dis­trib­uted back to them. How- ever, given that Gov­ern­ment and the Pub­lic In­vest­ment Cor­po­ra­tion (PIC) were Telkom’s ma­jor share­hold­ers – and would prob­a­bly sup­port the deal – its other share­hold­ers’ sup­port was rel­a­tively less im­por­tant.

Would ac­cel­er­ate in­fra­struc­ture in­vest­ment. Reuben Septem­ber

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