Telkom Receives Green Light for R6.7 Billion Tower Sale

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JIMMY MOYAHA: This deal has been in discussion for approximately three years. It has faced various setbacks, including regulatory approvals, but it has finally overcome those obstacles. Icasa, the Independent Communications Authority of South Africa, has authorized the sale of Telkom’s masts and towers business, Swiftnet, in this R6.75 billion agreement.

I’m joined by tech analyst and journalist from Business Day, Mudiwa Gavaza, to discuss this further and unpack the deal. Good evening, Mudiwa. It’s always a pleasure to have you.

The last time we chatted about this deal was over coffee, where we questioned whether it would ever move forward. We had various opinions about the readiness of the buyer and the likelihood of approval, and it seems we’re finally making progress.

MUDIWA GAVAZA: Yes, we are moving forward, and Telkom will finally be able to remove this business from its balance sheet.

They have been working on this deal for roughly five years now.

As you previously mentioned, the deal has gone back and forth, but they’ve managed to make it happen, although at a significantly lower value than initially discussed.

JIMMY MOYAHA: Mudiwa, what does this mean for Telkom? They’re shedding 4,000 towers and masts from the Swiftnet division; they’ll gain some revenue. What’s the next step?

MUDIWA GAVAZA: Several factors are at play. We must acknowledge that the market conditions differ greatly from 2019 when Telkom, under Sipho Maseko, first expressed intent to sell.

Back then, the valuation was estimated at around R13 billion. Observers will recall that Telkom had suspended dividends and taken on considerable debt for infrastructure investments, making this deal crucial to aid in reducing that debt and improving cash flow.

That rationale still holds, but now the value is much lower.

Initially, the valuation was R13 billion, which then dropped to R10 billion, then below R10 billion, culminating in the current R6.75 billion.

The expectation is that the funds will primarily go towards debt repayment.

Recently, we spoke with their CEO, Serame Taukobong, who expressed satisfaction with the group’s debt ratio, which has improved from above 1.8 times to about 1.2/1.3 times, potentially lowering further with this transaction.

Additionally, they will focus on investing in capital expenditure (capex) to expand mobile network coverage in demand areas and enhance fiber connectivity where it’s needed.

JIMMY MOYAHA: Mudiwa, the company must make some difficult decisions on navigating this new landscape, knowing that their strategy will differ significantly from original plans. What is left of the organization post-transaction?

MUDIWA GAVAZA: Post-transaction, there are three primary divisions remaining.

Telkom will retain its Consumer division, primarily Telkom Mobile, the systems integrator BCX, and Openserve, which focuses on fiber.

Previously, Telkom managed around five divisions until the sale of Swiftnet and their properties business, Gyro, which has also seen significant divestitures. Now they are left with a mobile business, a fiber infrastructure unit, and a systems integrator.

The company’s strategy indicates that all their services will rely on fiber infrastructure, being the largest fiber network operator in the nation, aiming to compete effectively against rivals.

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Entering the market, they have a mobile business supported by fiber, as much of the capital investments made by competitors like Vodacom and MTN include ‘fiber backhaul’ that links tower infrastructure to core networks.

Given Telkom’s prior investments, they will have lower capex rates than others. If Serame is right, they are also handling more data and allocating their capex more efficiently.

JIMMY MOYAHA: In the telecom sector, we’ve debated about positioning. Should you be a tech provider or infrastructure provider? Telkom’s selling Swiftnet likely aims to reduce the infrastructure burden on its balance sheet. Other telcos have opted for the MVNO pathway, preferring to leverage external infrastructure.

How can we reduce fiber costs, given that Openserve and Telkom are well-positioned to do so while still maintaining profitability?

MUDIWA GAVAZA: Jimmy, that’s a crucial point.

Understanding Telkom’s market position is likely what’s keeping Serame’s team awake at night.

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Should they be evaluated as a traditional fixed-line operator when their legacy business represents only 20% of operations? Should they be judged as a fiber network operator or as a mobile operator given their rapid growth?

For instance, Vodacom is assessed primarily as a mobile operator, despite their broader ambitions in fiber with partners like Remgro and Maziv.

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Telkom operates as a mobile provider, but it also encompasses various segments that constitute a large part of their revenue.

From my perspective, they must educate the market about their business model and what drives revenue and profitability. The efficiencies we discussed earlier, where mobile and infrastructure operations depend on the pre-established fiber network, require clearer communication.

If you evaluate them solely as a mobile provider, they may appear to lag behind; similarly, judging them based on any single segment may highlight their shortcomings in profits or capex expenditures.

Clearer communication is vital.

Furthermore, analysts may need a blended approach when assessing Telkom, as their BCX unit competes with firms like Altron and EOH, while Telkom Mobile goes up against MTN and Vodacom, and their fiber segment competes against Vumatel and MetroFibre.

Read: Data-driven approach powers Telkom’s HY growth

To me, an integrated evaluation is crucial going forward. Whether market players will adopt this is uncertain. You often analyse these trends; what’s your take?

JIMMY MOYAHA: [Chuckling] Well, we’ve tackled many issues. I’d like to emphasize that they remain at least partly a state-owned enterprise (SOE). We haven’t even addressed that aspect. They face various infrastructure challenges, and it’s a clear example of needing to streamline operations to become more agile.

Being a jack of all trades is not ideal in this environment. It’s best to focus on specific areas of expertise, and achieving proficiency in multiple sectors is beneficial. However, we don’t want to risk returning to unprofitability after having made significant progress by overextending ourselves.

This matters, and it’s a conversation Telkom needs to have about their strategy.

As we conclude, Mudiwa, reflecting on the deal, with regulatory approvals completed and a lightened balance sheet, it’s worth noting the stock price hasn’t changed significantly. It opened around R30, actually around R34, and has fluctuated less than half a percent today.

Is this due to a thin market over the holiday, or have markets factored this in already?

MUDIWA GAVAZA: I believe it’s mainly the latter; the market appears to have accounted for this in their models already. Shareholders approved the deal back in May, and in September the Competition Tribunal also greenlit it, meaning market participants had time to react.

Read: Telkom gains competition tribunal approval for masts and towers sale

However, regarding Telkom’s share price, it’s notable that despite minimal movement today, they have been the top-performing telecom operator throughout 2024. MTN, for instance, is in negative territory year-to-date, while Vodacom has fluctuated within a narrow 1-2% range.

In contrast, Telkom is up 17% this year, which suggests that, at least parts of the market, are recognizing their strides.

JIMMY MOYAHA: Absolutely. A substantial part of that gain for Telkom occurred in November when they surged around 25%. The market responded positively to their developments, particularly after their recent figures were released.

It’s been a long time since their share price surpassed R30, and it’s encouraging to see it there.

Let’s wrap up our discussion here. Mudiwa, thank you for your time and insights, as always. Mudiwa Gavaza joined me to discuss the Telkom deal – finally receiving regulatory approval from Icasa to proceed with the sale of the Swiftnet division.

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