Telkom and a spectrum sale is government’s best bet to raise R30 billion

Research analyst at Nomura, Peter Attard Montalto, says that the South African government’s best option to raise money to fund struggling state-owned companies, is to sell its stake in Telkom and to auction off spectrum.

In a note to investors this week, Attard Montalto said that the government’s recent ‘quasi-bailout’ of SAA, and the threat of a R15 billion loan recall at Eskom from the Development Bank of South Africa, have put the state in a precarious position.

The volatility around SOEs, and the possibility of loans being called in at any given time, has forced National Treasury under finance minister Malusi Gigaba to look at some unpopular options to raise capital – and privatisation (through Private Sector Participation – PSP) has been thrown about.

According to Attard Montalto, it is unlikely that the government will engage in ‘real’ privatisation – the outright sale of SOEs or giving over total equity control – but will rather look to the Public Investment Corporation to move assets around.

The problem, he said, is that this form of ‘privatisation’ still carries issues of rent extraction and patronage – while the options of which state companies PSP transactions are applicable to is running thin.

“With over 700 SOEs there appears on the surface to be a huge amount of potential to choose from. However, many of these are technically SOEs but really are more like licencing or research authorities, and would not normally be considered SOEs in the normal sense, nor ones that could have equity issued,” the analyst said.

“Various associations and sectoral councils are also classified as SOEs but are not really suitable for PSP.”

The biggest SOEs (Eskom, Transnet, Prasa, Sanral, etc), are the more obvious targets – but governance issues as well as political sensitivities make them the hardest targets.

Sell Telkom

The most obvious target, Attard Montalto said, would be Telkom, which is effectively already run as a private company that is competitive with its peers.

Government’s 39.29% stake could raise R13.4 billion through a full sale to non-PIC investors, despite apparent reluctance from the ANC to do so.

“We think a sale of some part of the Telkom stake is more likely to occur but with PIC playing a large role,” Attard Montalto said.

“However, there is still considerable reluctance in the ANC to remove this, both directly in terms of the ideological issues of ownership but also strategically as a potentially slippery slope to other future sales.”

Other possibilities could include deals that have stalled in recent times, the analyst said.

For instance, the government pulled out of talks to sell its broadband company Infraco to Telkom last year and similar talks with Vodacom also broke down. Such a sale could net R3 billion to R4 billion, he said.

Related to this area, auction of spectrum is the next big fund raising opportunity for 4G.

“This has been delayed numerous times in the past year but according to the 14-point plan the Communications Ministry must start the licencing process by December,” Attard Montalto said.

“Valuations for such a process are uncertain but at minimum government wants to sell five blocks of spectrum for a minimum of R3 billion each, which means some revenue north of R15 billion might be expected.”

According to the analyst, combining a Telkom sale with spectrum sale could easily fill a R30 billion revenue hole in the budget for this fiscal year.

Read: Telkom announces massive ADSL and voice shake up

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Telkom and a spectrum sale is government’s best bet to raise R30 billion