Telkom is ready for M&A action – when it comes

With rumours swirling in about potential sector consolidation in the months ahead, Telkom CEO Sipho Maseko said his company is ready for a wave of mergers and acquisitions – should they happen.

Speaking to TechCentral editor Duncan McLeod following the publication of Telkom’s full-year results for the year ending 31 March 2020, Maseko said the market will become “very foul” in the next year or two as a result of the weak and deteriorating economy.

Companies must focus relentlessly on efficiencies and ensuring they are ready for whatever form consolidation might take.

Already, French telecommunications giant Orange has voiced its interest in entering the South African market (as well as Nigeria), with talk of potential in-market consolidation as well.

Duncan McLeod: There has been a lot of speculation in the market in recent weeks about possible M&A activity in South Africa’s telecoms sector. Telkom itself looked at Cell C last year. How do you see this market shaping up over the next 12 months? Do you think there’s need for consolidation, and if so, what role do you see Telkom playing in that consolidation?

Sipho Maseko: The market will become very foul over the next 12 to 24 months. The economy is depressed. There will be zero growth. Efficiencies will be the name of the game, not only in this sector but across the economy. We’ve been tidying up our balance sheet, making sure we conserve cash, so this gives us the flexibility and dexterity we need in case we have to pitch for spectrum or explore the right type of consolidation.

We have organised ourselves in such a way that any of our subsidiaries or divisions could be a factor in some of this consolidation. We could do something on fibre infrastructure through Openserve; we could do something through (property management business) Gyro; we could do something through (IT services business) BCX.

We are not tied to some kind of inorganic play in the traditional telco sense, but we can do something on towers if that’s the right opportunity. We can do something on BCX if it’s the right opportunity. We have the balance sheet, we have operating model flexibility, we are in the right business areas that will become crucial in the 2020s. And we have been able to execute on the right initiatives over the past seven years.

DM: How serious is it for Telkom that you weren’t able to do a deal with Cell C?

SM: We have always said our strategic thrust is not necessarily dependent on the M&A that we do. We’ve always run the business as if there won’t be any M&A and that is why we had to get our mobile business absolutely cranking so if the M&A comes, it finds us on a solid platform, and if it doesn’t come, we can proceed (as before).

DM: Given the current environment, do you see Telkom playing any sort of consolidation role (as an acquirer) or do you think if there is consolidation it will be bigger players approaching Telkom?

SM: (Laughs.) I don’t know. Either way, we are ready. We are not a distressed asset. We have a tidy balance sheet. If there are opportunities for us to be the catalyst, we could (do that). For the same reason, if we are the intended target, it means our shareholders at best should be able to get fair value for the asset. Telkom is not in a corner.

DM: Is your mobile business still growing as fast as you’d like it to. From end-September 2019 to end-March 2020, the number of mobile subscribers grew by 4.3%. That looks a major slowdown on previous levels of growth. What’s the reason for that?

SM: In the first half of the financial year, we had shown a lot of growth, but we had cleaned up the base. We had distributors who brought us poor-quality customers. Now we are only targeting quality subscribers and we are managing our cost of acquisition and enhancing the average spend of the customers we have. It was a slip-up over six months which made me unhappy because we had not-properly-vetted distributors who were not helping us strategically. I want to grow, but I want profitable growth. I’m happier with our mobile team’s response in the second half of the year than the first half of the year.

DM: You mentioned you’re looking to move beyond “functional” separation of your wholesale division Openserve to “structural” separation. What does this mean exactly?

SM: Right now, they (Openserve and Telkom) are functionally separated organisations. Structural separation means we will have a proper subsidiary with its own legal structure, balance sheet assets and board. It will still be 100% owned by Telkom Group.

DM: Is this being done in anticipation of a possible future sale of Openserve, or is the business strategically important to Telkom?

SM: It’s very strategic. Remember what we said a couple of years ago, which was that by running Telkom as vertically integrated, we were cross-subsidising and hiding inefficiencies. The functional separation allowed us to shine a light into areas of inefficiency. Openserve, for instance, had about 16 000 employees when I started (as CEO in 2013). Now it’s about 6 000. They’ve become a lot more efficient; their maintenance costs have come down – you can see it! Their re-despatch rate has improved, their average time to install has improved… Productivity has gone up and they’ve taken costs out. They can now compete with their peer group.

DM: You are seeing huge value in Gyro tower infrastructure business. Any guesstimates on the valuation of that business should you decide to sell it?

SM: We have indicated what the peer group valuation is at – about 9-11x Ebitda (earnings before interest, tax, depreciation and amortisation). If you look at the Ebitda that the Gyro towerco generates, which is about R1-billion, you’ll have a range of R9-billion to R11-billion.

DM: You made it clear in your presentation that you believe Telkom is undervalued at the current share price.

SM: Yes. By federalising the business model, we want to give as much transparency on the income statement and the balance sheet of each of these entities (Openserve, Gyro, BCX, etc), because then you can value them properly as standalone businesses.  — © 2020 NewsCentral Media