Tuesday, January 18

Telkom in talks with strategic partners for IT business


FIFI PETERS: Telkom published its results earlier today. You will recall that it graduated to become South Africa’s third largest mobile operator in a pandemic here, that was in 2020. However, first half earnings increased by about a third this time as the company managed to reduce its financial costs. by paying off more than 1 billion rand in debt. However, the group’s revenues for the six months to September were stable as growth in the mobile data business was offset by low demand in its fixed line and IT business.

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We have Telkom CEO Sipho Maseko here to review the numbers in the Market Update. Sipho, thank you very much for your time. I see that it has grown even more in terms of its subscriber base, increasing subscribers by 18% this time to just over 16.2 million. Very commendable. But I see that there is still pressure on the average revenue per user. Can the first half of the year characterize us?

SIPHO MASEKO: Thank you very much, Fifi, for inviting me to your show as always. It has been a difficult period, not only for us as Telkom but for all South Africans. The economy has remained very, very lackluster. The COVID pandemic has wreaked havoc in the past 18 months or so. Businesses have really suffered from the uprisings in Durban in KZN and in Gauteng. All of that has had the combined effect of impacting commerce, impacting jobs, impacting how customers spend their money. I believe that we are not immune, like Telkom, in terms of our customers experiencing it, our customers experiencing it, both our business customers and our retail customers. So it has been a very, very difficult year, and we had to exchange a lot of things.

When times are tough, it is very, very helpful and necessary for you to reduce your debt levels so that your balance sheet is not so difficult to manage in the future and you have the flexibility to do other things that the market may throw at you. Then [it’s] a year of dividend yield, but I think the strength of the leadership team has helped them get through the period in a very resilient way.

FIFI PETERS: So let’s talk about some of the business pressure areas, particularly in IT. In his statement, he says that he is potentially looking for a strategic partner to, perhaps, put that business on a firmer footing in the future. The rationale around this? Have you started searching and received any expressions of interest so far?

SIPHO MASEKO: Well, we have started looking. I think the world of information technology is evolving in a very interesting way. It has, on the one hand, hyperscalers that are bringing global applications to our floors, and clients and all of them would be cloud-based services. On the other hand, our clients would also need a minimum of, in a sense, apps suitable for the purpose they use, and I suppose it has become very, very clear to us.

Let me give you an example around cybersecurity. The need for cybersecurity skills has been on the rise and incidents on the rise. But we won’t be able to grow that skill base fast enough to keep up with customer demand. That’s where a strategic equity partner comes in, because therefore we seek to partner with those who would have a host of such seemingly global skills that we can lean on from a capability perspective, but at the same time. time allow us to provide our own local referral in order to better serve our customers.

The big banks are our clients. The biggest retailers are our customers, the big pharmaceutical chains, and we need to be able to offer them some of the solutions that their peers use globally. We are talking to a couple of people. We want to make sure it’s not just a technical adaptation that we work for, but also a cultural adaptation – people we can work with in good times and bad.

FIFI PETERS: So Sipho, as part of the other steps the group is taking to unlock shareholder value, is the to-do list for its tower business. What other hurdles must be overcome for that to be a swipe deal?

SIPHO MASEKO: Practically a mate. We have done the initial evaluation. We have had a preview. We have met many potential investors to whom we have analyzed all the financial aspects of the company, the plan and the strategy. We are finalizing the pre-listing statement. We have met with the JSE. They have already given us a quote code. We know exactly in which sector we are going to operate. The problem now is that we pull the trigger, given the right market conditions, and we intend to have done so by the end of the financial year, which is the end of March.

FIFI PETERS: Sipho, while the market has appreciated the group’s approach to strengthening the balance sheet, what is also notable among analysts is that the increase in earnings comes from the fact that financial costs were lower and not necessarily from more coming in. cash to business. So can you just talk to that point and talk about where the growth or profit increase will come from in your second half?

SIPHO MASEKO: Our second half will be better than the first. One of the things that affected our first half, for example, is that we have a backlog of orders of the order of 1 billion rand on the DCX. [digital consumer experience] side due to the global shortage of chipsets. So there is a lag that we see is narrowing in the second half of the year. The chipset also affected portable devices. In fact, if you look at our postpaid growth, it’s been a bit toned down because everyone has really been taking care of the stocks that they have.

Third, our fiber business continues to grow with many more homes to fiber and therefore we are also connecting many more homes. At the same time, we will launch a couple of rate plans on the mobile side to drive growth.

So I’m much more confident in our outlook for the second half, given all the heavy lifting we did in the first half. You always have to bring something positive to your shareholders. So when your income is stable and you have some cash, use it to at least strengthen your balance sheet so that you can always have a line of sight that no matter how much excess cash you have, you are not saving it for the future. for conserving or wasting it, but using it in such a way that it can improve the business.

FIFI PETERS: I know that you are a man who reads a lot and reads a lot of current affairs, and that you would be aware of the rumor in the market that MTN had done a work for you. So, Mr. Masako, has MTN approached you regarding a possible deal?

SIPHO MASEKO: Yes, Fifi, I read and read a lot. I read it almost at the same time that you read it. I can assure you that, as we speak, there is no agreement that I am analyzing or evaluating. I cannot speak for those who are said to have written letters, whether they wrote a letter or not.

But what I can confirm with you is that, as we speak, there is nothing on my table that is worth evaluating or that I am evaluating from the perspective of a proposed transaction.

FIFI PETERS: It’s okay. Many of the analysts we spoke to said that if there was one thing they should look at on the table, there would be quite a bit of issues around regulation in terms of size: its size now as the third-largest player in the telecoms space. Your response to that?

SIPHO MASEKO: Well, in theory, I think that consolidation is inevitable at some point in this market, probably in the next two years. I also believe that all agreements are possible, Fifi. If you have the right remedy package, anything is possible. Therefore, I would not put it totally out of my reach. It depends on how you think about the remedy package in terms of …… both 8:56 Icasa, maybe issues related to the concentration of the spectrum or the Competition Commission, and it would take a little imagination to make sure you bring the right proposal to the regulators for you to see. There are also advantages, in terms of employment, in terms of competitiveness, in terms of growth capacity. I see all those possibilities

But sadly, there is no deal that I can evaluate at this time.

FIFI PETERS: In fact, some analysts were saying that the Cell C tie-in for Telkom makes a bit more sense, and I know this is something that has been pursued in the past. So is this [some] action Telkom has taken recently – talk to Cell C?

SIPHO MASEKO: I think that bus is gone. The market is essentially now a nearly three player market. Whether it will become a long-term three-player market or consolidate into a two-player market, who knows? But I think that either way there will be room for horizontal and vertical integration. It could be a telecommunications and financial services company, a content company, or a telecommunications company looking to grow. Scale gives you efficiencies and you need to be able to tell regulators, ‘This is how I intend to share those efficiencies with my shareholders and my clients.

FIFI PETERS: It’s okay. Sipho, finally, we are having this conversation days before the mid-term budget, and I imagine that the spectrum will be referred to. What are your expectations in this regard? I guess, more importantly, what can you tell us about where the legal proceedings are with the spectrum regulator?

SIPHO MASEKO: I expect fewer words about spectrum in the future, but more deliberate action that is properly designed to ensure that spectrum is actually released. I think the more pronouncements that are made complicate the spectrum allocation process. What is required now is that there be a clear commitment to an allocation process by the regulator. That process must be fair, transparent and applied consistently. You need those three things. Even if the result is difficult, we can live with it. But if the process is not clear, transparent, and applied consistently, not only Telkom but many others will have a hard time.

The challenge before the court now revolves around the temporal spectrum. It’s not just Telkom challenging that, but some of the biggest carriers have joined us for precisely those reasons. There is no justice, there is no transparency, there is no consistency, and any of those three things will get you if you’re not careful.

FIFI PETERS: Sipho, thank you very much for your time, sir. We will leave it there and await developments on that front. Telkom CEO, Sipho Maseko. +


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