Telkom’s decision to sell its stake in Vodacom ranks as the biggest business blunder in South Africa’s telecommunications market.
To understand the extent of the loss for Telkom, you have to start in 1993, when Vodacom was formed.
Vodacom, which launched South Africa’s first GSM network in 1994, was a joint venture between Telkom (50%), Vodafone (35%), and Venfin (15%).
In 1996, Vodafone and VenFin sold a 5% stake in Vodacom to a BEE company, Hosken Consolidated Investments Limited (HCI), for R118 million.
In 2002, HCI sold its 5% stake in Vodacom back to Vodafone and VenFin for R1.5 billion. The 1,171% profit is one of the most lucrative BEE deals in history.
When Venfin decided to sell its stake in Vodacom in 2005, Telkom passed on the opportunity, and Vodafone snapped it up for around R16 billion.
Telkom said the joint 50% shareholding did not work for it, and in 2008, it sold 15% of its Vodacom stake to Vodafone for approximately R22.5 billion.
Telkom distributed the remaining 35% to its shareholders through Vodacom’s JSE listing.
Soon afterwards, Telkom announced that it would build its own mobile operator, 8ta, to take on Vodacom, MTN, and Cell C.
Over the past thirteen years, Telkom has spent R25 billion on its mobile network but is still far from competing effectively against Vodacom and MTN.
In fact, Telkom has roaming agreements with both mobile giants to serve its customers.
Telkom was also eyeing new mobile licenses in numerous African countries, a strategy that never materialised.
Big business blunder
When Telkom sold its 15% stake in Vodacom for R22.5 billion, it was done at a valuation of R150 billion. A 50% stake in Vodacom was, therefore, worth R75 billion.
Today, Vodacom has a market cap of R230 billion. It means that Telkom’s former 50% holding would be valued at R115 billion.
It equates to 53.3% holding period price return with an average dividend yield of 6.04% over the same period. It equates to an average total annualised return of 9.26%.
Comparing the difference in return on invested capital (ROIC) and the weighted average cost of capital of Telkom and Vodacom (WACC) clearly illustrates the poor decision.
Over the last ten years, Telkom had an average ROIC and WACC of 6.40% and 11.13%, respectively.
Vodacom, in comparison, had a 23.55% return on invested capital and an 11.38% weighted average cost of capital.
In simple terms, Telkom lost 5.11% of the value of its invested capital per year. Vodacom, in comparison, created 12.18% per year on the value of its invested capital.
These figures show why Telkom’s former chief strategy officer, Miriam Altman, described selling Vodacom as one of the operator’s biggest mistakes.
The charts below show Telkom and Vodacom’s ROIC versus WACC.