Telkom in talks to sell Swiftnet

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SIMON BROWN: I’m chatting now with Serame Taukobong, CEO of Telkom. Serame, I appreciate the time today. You’ve had a bunch of proposals coming Telkom’s way, the most recent [of which] you and your board rejected last week. Of course there’s been Rain, there’s been MTN as well. Patently a lot of folks think there’s value in Telkom. Patently you and your board also agree with that. I suppose the first question is: are you and your board confident of unlocking the value which everyone is seeing in the business?

SERAME TAUKOBONG: Absolutely. I think the market has rightly been punitive towards us because the value-unlock journey has been slow in execution. We are speeding up that process quite rapidly, and thus the board remains confident that we can unlock the value, particularly at the pricing that is most probably favourable for shareholders. So to answer you bluntly, the board remains confident that we can unlock the value and we will continue that path –  and for us it’s execution with speed and passion.

SIMON BROWN: Part of that unlock was Swiftnet, and the listing was due for early last year. It got pulled [owing to] market conditions. It was the first bear market in a decade or more. I imagine that is still on the table to bring back to market at some point.

SERAME TAUKOBONG: The board has allowed us to also pivot on that one. We have been given support to actually sell the towers outright. We are in the process of that, and hopefully in the next month or two we’ll be able to announce, so the process is quite advanced. We’ve two firm bidders in that regard and we should be closing that process, as I say, within a month or two.

SIMON BROWN: Okay. We’ll keep an eye on Sens for that. Obviously that would be a fairly significant sale. The cash that then would come in – would that be retained? Are you needing that sort of level of cashflow? Could it be returned to shareholders?

SERAME TAUKOBONG: Well, partly it is to balance or correct our balance sheet, so it’ll be a significant contributor to our negative free cash flow. Post that we can look if we want to consider a special dividend, but we are not [seeing] that right now. We’ve spoken to our shareholders; they certainly expect that income to really recalibrate our balance sheet, which intrinsically is actually quite lazy. But depending on which market you talk to, at a 1.8 debt-to-Ebitda ratio, if you look at a pre-IFRIS it’s about 1.3, and for an infrastructure business, most infrastructure, if you look at their debt-to-Ebitda ratio it is quite high.

So our balance sheet is quite strong, but I think the cash income from the sale of the towers will certainly help us recalibrate our balance sheet, but also put more investment in capex, particularly for our fibre business.

SIMON BROWN: I wouldn’t have called it a ‘lazy’ balance sheet, but certainly it’s not a stretched balance sheet in that regard.

Moving on to Telkom Mobile, you’ve got about 18 million customers there. It puts you firmly in position three. Is this now a large enough base, and is this at critical mass and profitability at that number of users?

SERAME TAUKOBONG: I think what’s key when you look at the Telkom Mobile base is the share of data revenue. Data is 80% of our revenue at published numbers. We are about R12 billion, MTN is about R14 billion/R15 billion. So we are close to getting to the real market, which is a data market. Importantly for us is that if you look at the 2G base, 2G/3G base, it’s quite a significant base in the market. And that for us is the bigger opportunity for Telkom Mobile to grow. So there are potentially about 20 million 3G subscribers that sit in what I call an MTN base. That’s an opportunity for us to go after those, because we have intrinsically built a data-driven mobile proposition which would be very attractive to those subscribers.

SIMON BROWN: And that’s what mobile became. I saw a brilliant quote many, many years ago that the mobile phone killed telephones because it just became about data.

SERAME TAUKOBONG: Yes. That is the critical part. And critically, if you then take a 2G subscriber and move them to 4G, your output increases about 25/35% because they start using WhatsApp and Facebook and all these things. And that’s what we’ve built our Mobile base on.

SIMON BROWN: I imagine sort of YouTube – I can’t imagine that didn’t even load on 2G. You need that 4G for it.

Turning to BCX, which is your business division ICT, it’s a tough economy out there. We know the story. High rates, load shedding, etc. Does this hurt the business or is ICT almost immune to a degree because of its importance to businesses these days?

SERAME TAUKOBONG: Generally the most unfortunate part is that when corporates start to cut money, they cut in ICT. But the angle that BCX has, which is [to] the benefit of Telkom, is that connectivity is key. So we come in with connectivity and then we layer services on top of that, which is the angle that BCX brings to us.

SIMON BROWN: That’s almost like mobile and data, where that connectivity gives you a beachhead into corporate, into a business.

SERAME TAUKOBONG: Absolutely. But then you need to add services to it. So for instance BCX has made acquisitions looking at cybersecurity, which has been quite an important part for us. What we realised in the past two years [is that] BCX has actually stepped in where companies were under cyber attack, and as a result of that actually worked up with more business. So that’s the opportunity for us. Cybersecurity is relatively immature in a sense, and we make investments ahead of that.

Secondly, BCX is also gearing [itself] up for SAP HANA, particularly on cloud services, because in the next four or five years everybody is going to be going to be with SAP HANA on the cloud. And that’s where BCX is gearing itself to make sure that we are up in the game. That’s the partnership with Alibaba, for example, to give us more cloud services and more depth.

SIMON BROWN: That almost is the future of ICT. I take your point in security, which is mission critical for any organisation; whether you are a bank or a corner grocer you don’t want a cyber threat. But it’s moved to the cloud. Again, 20 years ago we were talking about the idea of a slim desktop with everything in the cloud, and that dream has finally arrived.

SERAME TAUKOBONG: Many people don’t know this, but Telkom actually owns 10 data centres. Almost three are CAT4. So we are getting ourselves to be providing those cloud services, and BCX is driving the forefront of that.

SIMON BROWN: We’ll leave that there. Serame Taukobong, CEO of Telkom, I really appreciate the time today.