Telkom in talks with strategic partners for IT business

FIFI PETERS: Telkom released its results a little earlier today. You’ll remember it graduated to become South Africa’s third-largest mobile operator in a pandemic year – that was 2020. Nonetheless, first-half profits have jumped by about a third this time around as the company managed to lower its finance costs by paying off over a R1 billion worth of debt. Group revenue, however, for the six months to September was flat, as the growth in the mobile-data business was offset by soft demand in its IT and fixed-line business.

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We have Telkom CEO Sipho Maseko here to review the numbers for us on the Market Update. Sipho, thanks very much for your time. I see that you’ve got even bigger in terms of your subscriber base, growing subscribers by 18% this time around to just over 16.2 million. Quite commendable. But I see that there’s still pressure on the average revenue per user. Can you just characterise the first half of the year for us?

SIPHO MASEKO: Thanks very much, Fifi, for having me on your show as always. It’s been a tough period, not just for us as Telkom but for all South Africans. The economy has continued to be very, very lacklustre. The Covid pandemic has been wreaking havoc over the last 18 months or so. Businesses have really suffered the uprisings in Durban in KZN and in Gauteng. All of that has had the combined effect of impacting commerce, impacting jobs, impacting how customers spend their money. I think we are not immune, as Telkom, in terms of our customers experiencing that – both our enterprise customers and our retail customers. So it’s been a very, very tough year, and we had to trade off quite a lot of things.

When times are tough, it’s very, very useful and necessary for you to reduce your debt levels so that your balance sheet is not as difficult to manage going forward, and give yourself [the] flexibility to do other things that the market may throw at you. So [it’s] a dividend yield year, but I think the fortitude of the leadership team has helped them just ride the period in a very resilient way.

FIFI PETERS: So let’s just talk about some of the pressure areas of the business, particularly in IT. You say in your statement that you’re potentially looking for a strategic partner to perhaps put that business on a firmer footing going forward. The rationale around this, and have you started looking, and have you received any expressions of interest so far?

SIPHO MASEKO: Well, we have started looking. I think the IT world is evolving in a very interesting way. You have on the one hand hyper-scalers who are bringing global applications onto our soil – and customers and all of those would be cloud-based services. On the other hand, you’d have our customers also needing a modicum of, in a sense, fit-for-purpose applications that they use, and I guess for us it’s become very, very clear.

Let me give you an example around cybersecurity. The need for cybersecurity skills has been growing and incidents are increasing. But we will not be able to add to that skill base fast enough to deal with the customer demand. That’s where a strategic equity partner then comes in, because we are therefore looking to partner with those that would have an abundance of such skills that would ostensibly be global, which we can lean on from a capability perspective – but at the same time enable us to bring our own local derivation to it in order to service our customers a lot better.

The large banks are our customers. The larger retailers are our customers, the big pharmaceutical chains – and we need to be able to bring to them some of the solutions that are used by their peers globally. We are talking to a couple of people. We want to make sure that it is not just a technical fit that we work towards, but also a cultural fit – people with whom we will be able to work during good times and in bad times.

FIFI PETERS: So Sipho, as part of the other measures that the group has is taking to unlock value for your shareholders, there is the pending listing of your towers business. What other hurdles need to be overcome for that to be a slam-dunk deal?

SIPHO MASEKO: Virtually slam dunk. We’ve done the initial assessment. We’ve had a pre-look. We’ve met quite a lot of potential investors whom we’ve taken through the full financials of the company, the plan and the strategy. We are finalising the pre-listing statement. We’ve met with the JSE. We’ve been given a ticker code already. We know exactly under which sector we are going to be trading. The issue now is for us to pull the trigger – given the right market conditions – and we intend to have done this by the end of the financial year, which is the end of March.

FIFI PETERS: Sipho, while the market has appreciated the group’s approach to strengthening the balance sheet, what is also notable among analysts is the profit boost came from the fact that finance costs were lower, and not necessarily that more cash is coming into the business. So can you just talk to that point and talk to where growth or the boost in profits is going to come from in your second half?

SIPHO MASEKO: Our second half will be better than the first half. One of the things that impacted our first half, for instance, is that we have a backlog of orders in the order of about a R1 billion on the DCX [digital consumer experience] side because of the global shortage of chipsets. So there’s a lag there that we see unwinding in the second half of the year. The chipset also impacted handheld devices. In fact, if you look at our post-paid growth, it has been kind of muted because everybody has been really looking after the stocks that they have.

Thirdly, our fibre business continues to grow with a lot more homes with fibre, and we are therefore connecting a lot more homes as well. At the same time we’ll be launching a couple of tariff plans on the mobile side to boost growth.

So I’m a lot more confident with our outlook on the second half, given all of the heavy lifting that we did in the first half. You always have to take something positive to your shareholders. So when your revenues are flat and you are sitting on a bit of cash, use that to at least strengthen your balance sheet so that they can always have line of sight that, whatever excess cash you have, you are not just keeping it for the sake of keeping it or wasting it, but using it in such a way that you can make the company better.

FIFI PETERS: I know that you’re a man that reads very widely and reads a lot of current affairs, and that you would be aware of the rumour in the market that MTN had made a play for you. Therefore, Mr Maseko, has MTN approached you regarding a possible deal?

SIPHO MASEKO: Yes, Fifi, I do read and I do read a lot. I read that almost at the same time that you read it. I can assure you that, as we speak, there is no deal that I’m looking at or evaluating. I can’t speak for those who are said to have written letters – whether they did write a letter or not.

But what I can confirm with you is that, as we speak, there is nothing on my table that is worth evaluating or that I’m evaluating from a proposed transaction perspective.

FIFI PETERS: All right. Quite a number of the analysts we spoke to said that if there were to be something that you would need to look at on the table, there’d be quite a lot of issues around regulation in terms of the size – your size now as the third-largest player in the telecom space. Your response to that?

SIPHO MASEKO: Well, theoretically speaking I think consolidation is inevitable at some point in this market, probably in the next two years or so. I also think that all deals are possible, Fifi. If you have the right remedies package all [deals] are possible. I would therefore not put it totally out of reach. It depends on how you think about the remedies package in terms of us waging both Icasa, maybe issues around spectrum concentration or the Competition Commission, and you’d need a bit of imagination to make sure that you bring the right proposition to the regulators for them to look at. There are also the pluses as well, in terms of jobs, in terms of competitiveness, in terms of ability to grow. I see all of those possibilities. But unfortunately there is no deal for me to evaluate at the moment.

FIFI PETERS: In fact, some analysts were saying that the tie-up with Cell C for Telkom makes a little bit more sense, and I know that this is something that was pursued in the past. So is this [some] action that Telkom has taken recently – to talk to Cell C?

SIPHO MASEKO: I think that bus has left. The market essentially now is almost a three-player market. Whether it will pan out as a three-player market in the long term, or it will consolidate into a two-player market, who knows? But I think either way there will be room for both horizontal and vertical integration. It may be a telco and a financial services company, or a content company, or a telco looking to become bigger. Scale gives you efficiencies and you need to be able to then say to the regulators ‘This is how I intend to share those efficiencies between my shareholders and my customers’.

FIFI PETERS: All right. Sipho, just lastly, we’re having this conversation days before the medium-term budget, and I imagine that there will be reference made to spectrum. What are your expectations in that regard? I suppose, more importantly, what can you tell us about where the legal proceedings are with the regulator over spectrum?

SIPHO MASEKO: I’m hoping for fewer words about spectrum going forward, but more deliberate action that is properly designed to ensure that spectrum actually gets released. I think the more pronouncements that get made complicate the spectrum-allocation process. What is required now is that there must be a clear commitment to an assignment process by the regulator. That process must be fair, transparent, and consistently applied. You need those three things. Even if the outcome is difficult we can live with that. But if the process is not clear, transparent and consistently applied, not just Telkom but a whole lot of other people will have difficulties.

The challenge that is before the court now is around temporary spectrum. It is not just Telkom challenging that, but some of the larger operators have joined with us precisely for those reasons. There is no fairness, there’s no transparency, there’s no consistency, and any one of those three things is bound to trap you if you’re not careful.

FIFI PETERS: Sipho, thanks so much for your time, sir. We will leave it there and wait for developments on that front. Telkom CEO, Sipho Maseko.