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