WITH Telkom's sale of a 15% stake in Vodacom for R22.5bn, and the ultimate unbundling of its remaining 35% stake in the country's leading mobile operator, significant value should finally be unlocked.
Although the transaction is still subject to a number of conditions, it seems a done deal, given that it has the support of both government - the biggest shareholder - and the company's board of directors.
Assuming it does go through, the next big question is what Telkom will do with the cash.
Institutional investors have campaigned Telkom's management for some time to unlock value - by proceeding with the Vodafone transaction, because that was the only concrete proposal on the table to separate the two assets Telkom and Vodacom - and to return cash to them.
Lots of lovely lolly
Although the heads of Telkom's various divisions must be rubbing their hands together in pursuit of all that lovely lolly that could enable them to expand, institutional shareholders simply don't trust Telkom's management team to deploy the cash wisely. It doesn't have a track record in this regard.
Some want to see at least 75% of the cash proceeds returned to them in the form of a special dividend (see Finweek's October 23 issue). That would amount to about R33 a share.
But others say this is not realistic.
Zwelakhe Mnguni, a Stanlib fund manager who has been particularly proactive in fighting for Telkom to unlock value in the past few months, says he has no problem with letting Telkom keep enough cash to deploy its fixed wireless network and provide the initial funding for Multi-Links Telecommunications in Nigeria.
After tax and debt, the proceeds for Vodacom would amount to about R20bn, and although Telkom has said it only needs R1.7bn to deploy its fixed wireless network, Mnguni said it would allow up to R2.5bn.
Multi-Links has funding requirements of $533m, of which Telkom's share is $400m, or roughly R4bn following the rand's plunge against the dollar (it owns a 75% stake).
Mnguni says Multi-Links should be able to fund its own network rollout thereafter. He, like other fund managers, believes Multi-Links will be a significant growth opportunity for Telkom.
This leaves about R14bn, or R27 a share, which Mnguni says he would be happy to receive as a special dividend: "To get more than that would be pushing it. R14bn is a good number."
He says Telkom should be able to fund the balance of its next generation network upgrade out of ongoing cash flows, and still declare an ordinary dividend at the next year-end to March 2009.
Less than nothing
Mnguni says it would be "very short-sighted" of the investment management community not to let Telkom fund its fixed wireless network: "It must be up and running as quickly as possible."
He says this would significantly cut network maintenance costs and customer service levels should improve.
Despite any negativity towards Telkom as the monopolistic incumbent up against a rising tide of competition, Mnguni believes it can still be a great asset, "which is why I am willing to give them the cash they need to build their fixed wireless network".
And yet, despite announcing the Vodafone deal, pegging its stake in Vodacom at a value of R75bn, the market is still only valuing Telkom shares at around R60bn, giving the fixed line operations - a business that generated a net profit of R8bn in the 2008 financial year - a valuation of less than nothing.
Even though the markets are going through a historically unprecedented period of volatility and uncertainty, the mind still boggles at this.
Mnguni promises that it will continue to make sure the value in Telkom is recognised by the market.
He hopes that by year-end, it will have given the market an indication of how much cash it will pay out to shareholders. That's the next step.
Although shareholder activism has not always proven to be as constructive at unlocking value as originally hoped, this one sounds like a good cause.
Telkom is not an ordinary company. It is still essentially government-controlled (it has a 38% stake and the Public Investment Corporation has another 15%) and management is not highly regarded. It also operates in a declining market, although it does have some potentially good growth prospects (like Multi-Links), if it gets this right.
So all strength to Mnguni and any other so-called activists who persist at nudging management in the right direction! Shareholders should only benefit from this.
- Fin24.com