Cabinet right to can KT deal

Did Telkom need a foreign investor to help right itself? And was Korea’s KT Corp the right partner? These are questions that many will be asking in the next few days as we digest cabinet’s decision not to support the proposed transaction. By Steven Ambrose.

The past few years have been significant for Telkom. The market has shifted significantly and, after a slew of CEOs, it appears Nombulelo Moholi and her management team are getting things back on track. The advances of a company as big and successful as KT appeared both flattering and sensible. KT has helped transform the telecommunications landscape in Korea and assisted in making the Asian country one of the most connected in the world.

KT was founded in 1987 as a public corporation and, although it was formed out of state-run departments, it is now an independent company where the largest single shareholder is the Korean National Pension Service (NPS). The NPS has only 8,26% of the shares, which contrasts with Telkom’s major shareholder being government with an effective 50,7% (with a direct share of 39,8% and 10,9% through the PIC, state pension fund administrator), and clearly highlights how different the two entities are.

Telkom is without doubt the most significant provider of telecoms services in SA. The relatively recent deregulation of the market — following the successful case brought by Altech in 2008 against former communications minister Ivy Matsepe-Casaburri – has done little to alter significantly the landscape. An example is the total fibre-optic infrastructure owned and managed by Telkom exceeds 140 000 km, while all the other providers put together have reached a mere 14 000 km. Hardly any business does not use Telkom facilities, and a huge amount of all cellular traffic is delivered over Telkom’s network.

The operator has made spectacularly bad decisions in the recent few years, not the least being the Multi-Links disaster in Nigeria, where it lost more than R10bn — an investment, which if made locally, could have completely revolutionised Telkom’s network. SA is big enough market for Telkom and there is scope for growth and profit at home.

Many analysts have argued that the proposed KT deal would have been the saviour of a fast-failing Telkom. But the company is not failing that fast and its demise has been greatly exaggerated. Even its loss-making mobile arm, 8ta, will probably succeed in the long term, despite the branding confusion created by using “8ta” instead of “Telkom” in the name. Mobile is key to Telkom’s future and the company has the resources and know-how to make it work in the long term.

KT has deep experience in rolling out fixed and mobile broadband networks in Korea. We must bear in mind that SA is not Korea and our country has different demographics and population densities and a population that is far more diverse both culturally and economically.

The lessons learnt and the skills developed by KT in Korea may not map at all well to the SA context. KT is also an independent corporation with a management and shareholding structure that is very different to Telkom’s. Culturally, economically and structurally, there is no clear congruence between Telkom and KT Corp.

The proposed KT deal was starting to feel a bit like Telkom’s agreement with Telekom Malaysia and America’s SBC, struck in the 1990s. Huge promises of benefits and skills transfer were made then, along with all sorts of guarantees and financial arrangements that were biased in favour of the foreign partners. The result was a short-term financial windfall for government and huge, long-term cash outflows to SBC and Telekom Malaysia.

There was also little skills transfer and a ruinous five-year exclusivity deal over fixed telecoms, which became almost a decade in practice. This arrangement arguably resulted in SA falling 10 years behind the curve in infrastructure development. There were also massive profits for the foreign consortium once it exited the arrangement, with little benefit for Telkom or SA in the end.

I don’t believe SA or Telkom need KT. Technical expertise is there for the taking from any of the highly competitive vendors of all the technologies required by Telkom. The company retains a core of deep talent that is the envy of many local operators. The many issues Telkom faces will not be relieved magically by an injection of foreign know-how and managers. In fact, these may have created further delays in the recovery and rejuvenation of Telkom.

Government should now step back and let Telkom get on with business. Telkom has the skills and resources to make itself profitable and competitive.

I am not saying KT could not have made a significant contribution. But taking the cost of that contribution into account, cabinet may have made the right call.

Telkom needs to get back to basics, stop running around wooing external companies to assist in righting the ship, and focus on the fact that it is the biggest and in some respects best telecoms provider in SA.

It needs to bring telecoms, both fixed and mobile, to everyone in SA. Hopefully, this can be achieved at an affordable and competitive price, coupled with service levels that help the country prosper rather than hindering our growth and development.

  • Steven Ambrose is MD of Strategy Worx. The views expressed in this column are not necessarily shared by TechCentral.

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  • Adrian Schofield

    Interesting argument, Steven. It is premised on the assumption that it is even remotely possible for government to step back from interfering in Telkom’s operations, which it has shown no signs of doing in the last 18 years. 

  • Jasom mososi

    I do wonder how times you’ve called Telkom for service… i can bet R100 that numerous times… lets be practical and pragmatic about this… Telkom Sa is sustainable… it’s broke and has opportunity on the table and fix things…  

  • Tinykov

    I agree with Steven. KT does not possess a magic wand that will change the problems at Telkom like customer care. Telkom simply needs the will from its top management to do what is right and will start to gain its lost market share. So the answer lies within and not with the Koreans. We have the right people to fix Telkom here in South Africa.

    I seem to remember people like Alan Knott-Craig were even willing to take over at Telkom to help fix it.

  • TrueTenacity

    When telkom stops caring about how much profit they can get out of the customer and concentrate on how much innovation we can give them instead… then telkom will be on the right track…

  • Trekelny

    I’m afraid the best spin you could put on the government turning down the offer was that they actually see good value in Telkom and don’t want to share it. They forwarded a pile of gobbledegook as their reasoning in the public announcement; they didn’t say KT would be a security risk (because they aren’t, as the Chinese might be), they didn’t point to a jealous need for control (as what broke the Indian negotiations several times over the years with other players). They didn’t give a real reason at all, just implied that the BB push and overall value of the stake would be harmed somehow. The first assertion is patent nonsense- where on earth has BB achieved a more satisfactory penetration? So the government seems to fear dilution of some value. I don’t go as far as Mr. Ambrose in recognizing the potential value of Telkom as it stands, but the government must see it largely the same way.

    And I fully agree, they have no desire to step back from ownership. So- lead then.

  • Biscuit1018

    I saw quite a bit of the impact of SBC/TM on Telkom. Asset stripping and monoplistic behaviour and very little benefit to Telkom or SA.

    If it is looking like a similar arrangement then I agree ‘run away’. But Steven did it have that feel? I would love more info there

    A few additional points, one for Adrian
    a) Adrian – Even if an equity deal does go through it does not stop the govt interfering. I think we were hoping that govt would stop interfering if they sold part of their stake.

    b) I do have high hopes for Pinky. I have always rated her as a manager and thought she should have gotten the nod 2 CEOs ago

    c) I do wonder why the government introduced the parties in the 1st place?

  • Anonymous

    Stephen, your comments are controversial and thought-provoking, but you should be worried about your reputation as an analyst. There are only so many times that you can make wild predictions that turn out to be wrong.

    The argument of size doesn’t hold water. If anything, the recession has taught us that being big doesn’t help. Certainly, having a whole country full of taxpayers to bail you out does help (something else that the recession has taught us), but that’s not the point.

    Much as you may not like the Koreans, or any other “foreigners”, beggars can’t be choosers, and Telkom simply cannot continue to operate without a further cash injection. They’ve burnt through their profits from Vodacom, and, despite an actual decline in revenues, they need to continue to invest heavily just to stay competitive.

    Do you really believe that Telkom has any rabbits left in its hat, or are you a victim of their propaganda? You sound like one of their own PR people. Surely, one needs to look at actual results, and forecast what will happen if they continue on their current course. That’s what many analysts have done, and that’s why the share price tanked.

    Your views on 8.ta, are, frankly, ludicrous. There’s only one way in which Telkom is going to get anything at all out of 8.ta, and that is on a fire sale to one of its competitors. Otherwise, it’s just going to continue to be a bottomless pit into which they are going to have to pour money. Even fixed-mobile convergence is little more than a bit of marketing spin and some price bundles. There’s no sign that it’s stopping the haemorrhaging of fixed line customers, especially lucrative business customers, to their newer, more flexible competitors.

    You make a nice apology for the government, but what comfort do South African customers have that continuing to buy from Telkom is now not a high risk proposition. This may not have much impact on consumers, but businesses will certainly put a black mark against Telkom for this next time they choose a supplier.

  • dominic

    How could Telkom’s network form the core of an NBN if KT owned 20%?

  • Steven Ambrose

    You have read far more than I intended in many ways. Firstly I have no issue with foreign companies or investors. Secondly Telkom is far to critical to the South African economy to sell off piecemeal to any company. Thirdly many commentators and analysts seem to think 3 billion is enough to bail out Telkom, it is not, and that is even if Government use that money  to invest in telecommunications. I maintain KT are not a good fit and the so called benefits were completely overstated. My position is that Government should sell all its shares and fully privatise Telkom. There is unfortunately little Chace of that. Cabinet may have called it right even if their explanation made little sense. Telkom may go the way of SAA, I hope not as what they do is important for SA’s development. The main issue is all the other players put together can’t match the current scale and scope of Telkom, and may not for years, in spite of all Telkoms troubles.

  • Steven Ambrose

    Agreed, very unlikely Government will leave Telkom alone or get out, which is a real pity. They may just give them enough room to keep going and get a few thing right , perhaps until some other companies scan grow sufficiently to offer a credible alternative.

  • TTRH

    I would agree, but for me the KT deal represented a way to lower the government’s stake in the company and I feel that this is something that is sorely needed.

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