Cabinet is really the board of Telkom: analyst

Paul Theron, equities asset manager and CEO of Vestact says that South Africa’s Cabinet is really the board of directors of Telkom – while those people who were recently appointed to the board have no real influence on the company.

Government is the JSE-listed company’s largest shareholder with 39.8%, while the Public Investment Corporation owns 10.9% stake in Telkom.

The embattled telco is still awaiting feedback from cabinet on its future direction, after government initially tasked Communications Minister Dina Pule with devising a strategy for the group, having blocking a potential deal with Korean firm KT Corp early in 2012.

Pule said in January that Cabinet would announce its decision at an “appropriate time”.

Telkom’s share price contracted 42% last year alone, priced at R29.15 on January 3, 2012. By close of play on Thursday, Telkom’s shares priced at R16.68 on the local bourse.

Wrong decision

“Korea could have done great things with Telkom, in my opinion, because that’s what kind of country they come from, lots of fixed line ADSL type experience. But government decided they didn’t really want that, so now what?” asked Theron.

“The fixed line business gets fewer and fewer customers every year, ADSL has been a good seller, but then on the other hand the 4G thing means that everybody will go wireless, they are battling with regard to 8ta. They haven’t got the customers,” he said, speaking as a guest on CNBC Africa’s show Hot Stoxx earlier in the week.

Fellow guest and investment analyst at Investment Solutions, Chris Hart said: “Unfortunately there has been quite a lot of value destruction with Telkom. Because of the way technology works…they (Telkom) sits with quite a lot of legacy stuff which had value, but degrades quite quickly. And that’s the problem – how much value is actually in Telkom?”

Government interference

Hart said he didn’t have a problem with government’s ownership in Telkom, but rather “the fact that they are actually exercising it, and actually dominating, and making business decisions that don’t make sense”.

Theron noted that with the PIC stake in Telkom, it actually amounted to a 50% ownership in the telco.

“Effectively that means that the cabinet, the South African government cabinet is really the board of directors of Telkom. The people who got appointed to the board recently, and bless them I know some of them are great people, they have no real influence. It’s just a job.”

Telkom’s future

Looking ahead, Theron said he was not sure how Telkom’s future would play out. “Government has this idea in terms of the national planning commission, in that they must have cheap broadband for everyone, so it’s going to drift.”

The analyst said that the replacement value of Telkom’s assets amounted to approximately R30 billion (the group’s market cap is at R8.69bn), however he question the difficulty posed in unlocking Telkom’s value. “Who is going to be allowed to buy them?”

Harts chimed in: “They need to free it (Telkom) so that the market becomes less of an oligopoly. If that does happen then maybe MTN and Vodacom are not such a big buy if suddenly you really start to get strong competition. But that is not going to happen (with Telkom).”

“You’ve got a better chance of it snowing in Johannesburg,” Theron said. “What I foresee for them is just a perpetual frittering away of value over the forthcoming year.”

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Cabinet is really the board of Telkom: analyst