Telkom not a viable standalone business – analyst


FNB Wealth and Investments’ Wayne McCurrie said Telkom and Cell C are not viable standalone businesses and that Telkom would do well to rekindle talks with MTN.

McCurrie’s comments came on the back of poor interim results from Telkom, which revealed declining revenue and earnings.

A particularly concerning figure is Telkom’s net debt which increased from R14.1 billion in September 2021 to R16.3 billion in September 2022.

With Telkom’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) declining by 17.3%, it increased its net debt to EBITDA ratio from 1.1 to 1.7.

Telkom CFO Dirk Reyneke downplayed their rising debt, saying they still have R2.3 billion in unused facilities, which is enough to fund and invest in strategic initiatives.

McCurrie is not convinced, saying he is certain that Telkom and Cell C are not viable standalone businesses because of the capital required to compete against Vodacom and MTN.

“They are not going to go bankrupt tomorrow, but the amount of capital investment needed – especially with 5G coming along – is beyond their reach,” he said.

“To compete in the mobile telecommunications market, you need seriously deep pockets.”

Because Telkom and Cell C cannot build and maintain national networks, they carry a large portion of their traffic on Vodacom or MTN’s networks.

“There is no margin in that. You can see it in Telkom’s results which showed massive negative cashflows,” McCurrie said.

Sasfin Securities deputy chairman David Shapiro said another challenge is that Telkom needs to grow the mobile division much faster than the decline of the legacy business.

By now, the market hoped that this balancing act would have been a thing of the past, but it is still going on.

Sasfin Securities deputy chairman David Shapiro

A deal with MTN makes sense for Telkom

Shapiro said Telkom should have done a deal with MTN. “To have walked away from that was a poor decision, and you can see it in Telkom’s numbers,” he said.

“Telkom’s interim results were much worse than what we expected. A lot of it is because there was no more growth.”

McCurrie agreed, saying it makes sense for MTN and Telkom to resume discussions as Telkom offers a large asset and client base for cheap.

“It may be part of MTN’s strategy to have walked away from the deal and come in later with a lower bid,” he said.

Telkom CEO Serame Taukobong’s recent comments substantiate Shapiro and McCurrie’s views, saying they are open to starting discussions with MTN again.

“It is not the first time Telkom has been in discussions with MTN, and as the market changes with dynamics going towards consolidation, it is not something we will frown upon,” he said.

“We have a very good relationship with MTN, which includes a roaming agreement, and MTN is Openserve’s second biggest customer.”

“These conversations will continue. If you look at the T-Mobile and Sprint deal, it took a few attempts to materialise.”

Although Telkom looks keen to strike a deal with MTN, Taukobong made it clear it will not entertain selling its fibre and wholesale division Openserve.

“It is a core asset for us. We are definitely not considering selling a majority of Openserve,” Taukobong said.

Telkom financial performance

The charts below show some of the challenges faced by Telkom.