Monday, June 29, 2009

Telkom next to go bankrupt

Does it really come as a surprise that the world's worst telecommunications company is finally biting the dust?


Years and years of extravagance and waste. Huge bonuses paid to bloated black "diamonds" who won't get off their collective arse.

The irritating pre-recorded message that your call will be charged at normal cash cow rates while you wait for over half an hour to report a fault.

The abrasive call centre operator who tells you your router is faulty when you try to report your ADSL down. The hanging up on you when you ask for a report reference number.

The inept technician from Telkom who pitches up unannounced a month after you've finally reported your line down.

The sheer "fuck you" attitude of increasing ADSL bandwith caps for the 2GB and 3GB options to 3GB and 5GB with Seacom coming on line soon.

My dear spouse is now also gatvol of paying over R500 a month for Telkom's unreliable 3GB ADSL. So we both use MTN's HSDPA.

Pity that Neotel is aimed at businesses so it won't be of any use to private households. Rural development will be a complete failure without telecommunications.

But what the hell, it's all BEE business as usual. Don't be unpatriotic and complain about it. You will put off all the tourists who can't wait to experience Africa at its finest. Personally I don't give a stuff about Telkom but it's going to add to inflation when most people can't call you on a landline. Take your money offshore while the rand is still worth something.


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Telkom's financial year-end results released last week, has the shape of a massive soccer ball riddled with giant needles. You remove these needles (bad decisions), there's no ball left.

Financials for the year to March 31 show its operating profit tumbled nearly 30% to R6.4 billion. Headline earnings per share
nearly halved from R10.29 to R5.57.

Chickens have come to roost. A series of key strategic investment blunders over the years, is what Telkom is reaping today. The company's expansion into Africa has seen its Nigerian operations through its subsidiary Multi-Links losing just under R2 billion.

On May 1, 2007, Telkom had acquired 75% of Multi-Links for $280 million or R1.985 million, and on January 21, 2009, Telkom acquired the remaining 25% for $130 million. The deal was subject to a put option in favour of the minority shareholder. So, by the time the seller exercised its option, Telkom had overpaid by an estimated R500 million for a company that was under-performing.


Multi-Links put option was valued at R919 million on March 31, 2008 and at R773 million in September, what was the motivation for such a steep price increase to R1.3 billion? Clearly, this represents gross negligence on the part of Telkom's executive committee (EXCO).

With regards to the Multi-Links deal, EXCO failed in its fiduciary duties to protect the interests of shareholders. In fact, if you look at an item line called SG&A in the results, there's a jump of 68.8% in those costs to R3.4 billion from R1.1 billion in impairments to accommodate the losses associated with Multi-Links.



Under item line "Consultants & Security", fees jumped a whopping 25.9% to R1.5 billion in one financial year. I would say this is extra-ordinarily out of the norm. Let's look at Telkom's Africa expansion strategy.

Telkom's strategy to acquire ISPs as a method of African expansion is flawed. They have a subsidiary called Africa On Line (AOL), which has been accumulating losses since its acquisition in 2007. As if this was not enough, Telkom has added another ISP in the form of M-Web in the same market space where AOL has consistently failed. Why add on another of your ISPs in the same space?

Another giant needle in this big soccer ball is the issue of Telkom Media, which was sold to the Chinese recently. In August 2006, Telkom created Telkom Media to compete with Multi-Choice. Out of the blue, Telkom decided to divest, writing-off an estimated R1 billion in impairment of shareholders loans.

Telkom has also decided to delist from the New York Stock Exchange (NYSE) describing it as a waste of money. I would say both listings (on the JSE and NYSE) were big mistakes in the first place. It was a mistake to list such a key strategic developmental asset in a developing country with enormous social challenges like South Africa. In fact, in this example a shareholder conflict is created in as far as performance and expectations are concerned.

By listing a key state asset like Telkom, you are opening it to the dictates of an equity fund manager who wants high returns in a shortest possible period while the government desires to use the asset for the developmental needs of marginalised communities.

Let's use a very simple, but realistic example. If government wanted to use Telkom to increase internet penetration in rural schools and house-holds, would be contrary to the expectations of an equity fund manager who wants quick returns. This is simple because you cannot expect a high usage rate for such a customer base.

So, this means low returns for the company in this rural market, thereby causing conflict between the equity fund manager and the developmental aspirations of rural communities. That's why these listings were a mistake in the first place. As far as Telkom is concerned, heads are still going to roll. Mark my words.

3 Opinion(s):

Anonymous said...

I think this article sums it up well for African countries.

http://www.mg.co.za/article/2009-06-29-african-capitalists-parasites-not-creators

Anonymous said...

@Anon: Thank you. I'll post that one tomorrow.

Vince R said...

"Financials for the year to March 31 show its operating profit tumbled nearly 30% to R6.4 billion. Headline earnings per share nearly halved from R10.29 to R5.57"
And this is the only telecoms company available in Azania? Be afraid, be very afraid. Why, coz Mr Middle class tax payer is going to have to pay to prop it up when it starts going into the red, just like Eskom, just like SABCak.