Telkom-KT Corp deal bad news for Vodacom and MTN: analyst

An analyst argues that a deal between Telkom and KT Corporation (Korea Telecom) may result in high-volume, low-margin broadband products in South Africa, putting pressure on the margins of other operators like Vodacom and MTN.

KT Corp, South Korea’s largest telecoms company, recently completed due diligence on Telkom, ahead of a planned stake purchase.

In October KT Corp announced that it planned to acquire a 20% stake in Telkom in a deal worth R3.8 billion.

Despite the potential KT Corp deal, Telkom shares plummeted in recent months – down from a 12-month high of R38.49 in May 2011, to a 12-month low of R24.00 on Friday 30 March 2012, at the close of business.

Telkom share price over last 12 months
Telkom share price over last 12 months

This share price slump points to an investment community which has lost trust in Telkom, and Hlelo Giyose, chief investment officer at First Avenue Investment Management, explains that a deal with KT Corp is not necessarily good news for shareholders.

Speaking in an interview on Summit TV, Giyose said that KT Corp is known for its low-cost broadband services in Korea.

Giyose argued that KT Corp will import their low margin and low return model to South Africa, which is good news for consumers but bad news for shareholders.

Giyose added that KT Corp’s entrance into South Africa will be very disruptive in the local telecoms market, forcing Vodacom and MTN to relook their business models around data.

Giyose is not the only person who warned that the current telecoms business model, which relies on high-margin voice revenue, will change.

New Cell C CEO, Alan Knott-Craig said that the demand for data currently far-exceeds the supply. To fix this situation, higher broadband speeds and lower data prices are needed.

These lower prices mean lower margins to mobile operators, but according to Knott-Craig, that is unavoidable.

“Because this country started pretty late in building super-high capacity infrastructure, I guess the operators…were pretty much used to the margins [on data] they enjoyed from voice,” argued Knott-Craig.

Lower data prices translate into lower margins to operators, and this in turn will require a rethink of current business models. The growing trend of carrying voice over data will put further pressure on operators to move to a low-margin, high-volume business model, Knott-Craig said.

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Telkom-KT Corp deal bad news for Vodacom and MTN: analyst