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Placed on hold
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Larry Claasen
Financial Mail
Friday, June 25, 2010
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“You can take Telkom out of the Post Office but you can’t take the Post Office out of Telkom.” So goes an old joke in the telecommunications sector that pokes fun at the alleged conservative and bureaucratic mind-set at the operator.
Small telecom companies say they have to box clever to get a piece of the action, but that all Telkom has to do is use its near-monopoly power, stemming from its days when it was part of the post & telecommunications department, to get its way.
However, new legislation governing the sector has removed much of the legal protection Telkom enjoyed and provided these rival companies with a foundation to act more aggressively. This is forcing Telkom to change.
The group’s outgoing CEO, Reuben September, says the market is becoming competitive, as some companies are now deploying their own infrastructure and no longer depend on Telkom’s.
The group is adapting to the changes, says Telkom SA MD Nombulelo “Pinky” Moholi. “We have something like 400 competitors. It’s something we’ve seen coming for a long time,” she says.
Not everyone sees Telkom as becoming a kinder, gentler beast. “I don’t think it has changed that much, but then again it doesn’t have to,” says Kaplan Equity Analysts MD Irnest Kaplan.
Kaplan points out that many companies cannot switch to Telkom’s rivals because it is the only telecom group large enough to provide them with the scale of service they are looking for.
Telkom is facing stiffer competition but, paradoxically , it’s not all bad news for the group because the bulk of its competitors are also its clients .
Competition from other telecom companies is not the only challenge. Costs are rising faster than revenue, a sluggish economy, problems at Nigerian subsidiary Multi-Links, and pressure to keep prices low have all hurt Telkom’s numbers for the year to end-March.
“Yes, we are under pressure,” admits September.
Revenue rose 0,7%, to R37bn, operating profit dropped from R6,9bn to R4,6bn and operating margins shrank from 31,5% to 26,5%.
Besides the operational issues, there is also the matter of the alleged acrimony between its board and some of its top management, which resulted in September’s surprise announcement that he was to retire before the end of the year.
Moholi, who has been widely tipped as his replacement, declined to comment on the acrimony, saying only that the “internal process” will sort it out. She also declined to say if she was interested in the top job.
Besides searching for a new CEO, Telkom’s board is looking for a way to reduce its exposure to Multi-Links. It is giving its elf six to 12 months to either find a partner or sell its holding in the mobile phone operator.
The problems at Multi-Links have changed Telkom’s growth strategy by reducing its appetite for further acquisitions. Telkom chief financial officer Peter Nelson says, for now, the group will be concentrating on sorting out Multi- Links and launching its mobile phone service rather than being on the lookout for takeover targets.
The problems at Multi-Links stem in part from Telkom getting its sums wrong on how fast it expected that business to grow. Moholi does not see a similar thing happening to its planned mobile service because its business model factors in a drop in prices.
Telkom is confident it can make a success of its mobile service. Nonetheless, the uncertainty about the board’s role in running the organisation, given that government has a near 40% stake, and whether it can solve the problems at Multi-Links means Kaplan is taking a wait-and-see approach to the group. “It’s not something I’m running to invest in.”
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