Troubled Telkom tanks

Telkom’s share price plummeted by 7% on Friday and another 6% on Monday after it announced that it terminated discussions with a consortium headed by former CEO Sipho Maseko.

On 12 June 2023, Telkom said it received an unsolicited, non-binding indicative letter from the Maseko consortium to buy a controlling stake in the company.

The consortium consisted of Maseko’s Afrifund, Axian Telecom and the Government Employees Pension Fund, managed by the Public Investment Corporation.

Business Times reported that the Maseko consortium initially offered R46 a share for a controlling stake in Telkom.

After this offer was dismissed, they put a revised offer on the table, which was not significantly different from the initial offer.

Telkom has also requested the Maseko Consortium to provide further clarity on several matters, including the proposed offer price and funding certainty.

“As such, discussions remain of an exploratory and non-consensual nature, there being no certainty that the outcome of these discussions will result in a transaction,” it said.

More recently, Telkom CEO Serame Taukobong said the company is worth over R60 per share, and any suitors should see that as a benchmark before making an offer.

In the case of the Maseko consortium offer, Taukobong said no due diligence was done, and that is where the matter had ended.

Last week, the Telkom board said it had decided not to continue discussions with the consortium.

“It is the board’s view that the indicative proposal is not in the best interest of shareholders and that the current strategy will yield better value for shareholders,” Telkom said.

The market was pinning its hopes on corporate action, and the news of terminating discussions sent the share price 6.69% lower on the day.

The decline continued on Monday morning, and the share price was down by another 5.7% by the time of writing.

It is not easy to buy Telkom

History has proven that buying a controlling stake in Telkom is extraordinarily difficult and borders on impossible. Even buying a minority stake in Telkom proved impossible.

In October 2011, KT Corp, South Korea’s largest telecoms company, announced its plan to acquire a 20% stake in Telkom in a deal worth R3.8 billion.

The partnership was a perfect fit, as KT Corp had great expertise and experience in creating a modern telecoms company offering high-volume, low-margin broadband products.

By mid-2012, KT Corp had completed due diligence and was already working alongside Telkom to build a new telecommunications powerhouse.

However, on 1 June 2012, Telkom advised shareholders on 1 June 2012 that the strategic venture with Korea Telecom Corporation would not go ahead.

Telkom said the communication minister informed it that the cabinet had taken the decision not to support the transaction as proposed.

Soon afterwards, The Korea Times reported that senior officials at Telkom demanded “huge kickbacks” from KT Corp.

The paper said the rejection of KT’s offer underscored the determination of the South African government not to cede control over Telkom. Many in the ANC view it as an arm of the government.

“Senior officials at Telkom demanded huge kickbacks or bribes from KT. That’s probably why the South African government cancelled the deal,” a source told The Korea Times via e-mail.

“KT Corp wasn’t prepared to keep on paying kickbacks,” the source was quoted as saying.

Telkom and KT Corp dismissed the allegations, calling it “not credible, reckless, regrettable and defamatory”.

The KT Corp deal illustrated the challenge to acquire a stake in Telkom and working with the state-owned company.

Even when a deal makes perfect sense, the government can scupper it if it does not suit the political agenda at the time.

Regulatory and competition concerns

Even if the government and Telkom’s board like a deal, there is the Competition Commission and the Independent Communications Authority of South Africa (ICASA) to deal with.

In 2015, for example, the Competition Commission blocked a deal where MTN intended to acquire certain Radio Access Network (RAN) assets of Telkom.

At the time, Telkom’s mobile unit did not perform well, and it wanted MTN to take over financial and operational responsibility for the rollout and operation of its radio network.

As part of the deal, each party would have been able to roam on the other party’s mobile network. It made financial and operational sense.

However, the Competition Commission found that the proposed transaction was likely to substantially prevent or lessen competition in the mobile services market.

Telkom remains dominant in the fixed telecoms market and is the third-largest mobile operator with significant spectrum assets.

As such, any deal will be scrutinised by the competition and telecommunications authorities and will likely face opposition from its competitors.

Telkom susceptible to corporate manoeuvres

Telkom is also susceptible to behind-the-scenes manoeuvres, as seen when Rain scuppered the recent talks with MTN.

On 15 July 2022, MTN and Telkom announced they were in the early stages of discussions about MTN acquiring Telkom.

A merger made sense as it would have combined MTN’s deep pockets and mobile market strength with Telkom’s extensive fibre, tower, and property assets.

Armed with these assets, it could have rapidly expanded its fixed- and mobile data 5G products and assisted Openserve in significantly expanding its fibre-to-the-home coverage.

Such a telecommunications powerhouse could have hurt Rain, and it struck back with a brilliant corporate move which may be taught in MBA curriculums in years to come.

Soon after MTN and Telkom started discussions, Rain requested to present the Telkom board with a proposal to merge the two companies.

In September 2022, Rain made an official proposal to Telkom, suggesting the acquisition of Rain by Telkom for newly issued shares.

The Telkom Board said it was evaluating Rain’s proposal. This did not sit well with MTN, which wanted exclusivity.

A month later, MTN said it terminated discussions after extensive engagements as the parties could not agree on the process going forward.

Telkom said MTN terminated discussions as it was not in a position to provide MTN with assurances about exclusivity.

Rain successfully prevented the creation of a formidable competitor in the fixed broadband market by outmanoeuvring two of its largest competitors.