From bad to worse: With Moholi out, Telkom's trouble turns into crisis
Telkom’s share price has dropped 40% and the company, whose biggest stakeholder is the government, is now looking for a new CEO, chairman and non-executive board members. The Department of Communications says the company is a ‘strategic national asset’, but its interference is hurting the company, and the country, badly. Very badly. By MANDY DE WAAL.
The new season of SA telecom giant’s soap opera opened Monday, with Telkom announcing the departure of CEO Nombulelo (Pinky) Moholi who was widely respected by industry analysts for holding her own against government. The market reacted negatively to news of Moholi’s departure, and Telkom’s share price dipped on the announcement.
“The damage done by government to Telkom is incalculable,” information and communications technology analyst Arthur Goldstuck told Daily Maverick. “Telkom is being used as yet another political tool in the same way as tender manipulation and the appointment of deployed cadres is used to meet government’s obligations to those it owes favours to.
“Telecommunications is a growth industry that is delivering massive profits, and there is a huge flow of resources to telecommunications which makes it the ideal arena for deploying favours," said Goldstuck, and MD of World Wide Worx. By retaining control and asserting this control government can also manage the flow of favour through the telecommunications sector,” he added. His words echoed the sentiment of many local investment and industry analysts.
The current season of Telkom’s soap opera stalled in a cliff-hanger two weeks ago, when the minister of communication, Dina Pule, flexed government’s muscle in the telco’s annual general meeting (AGM) and ousted board members who weren’t government compliant. Pule also vetoed plans for share incentive schemes aimed at retaining management leadership. Telkom Chairman Lazarus Zim signaled his intention to step down in September, and was unable to be replaced during the AGM because of government's meddling.
“Pinky should be commended for taking a principled stand. I think her job was made impossible, but had she been a yes-person she would have swallowed the instructions of government and presided over a stagnant organisation while being richly rewarded,” Goldstuck said. Moholi was Telkom’s fifth CEO in some seven years. “The turnaround of leadership completely demolishes morale, but it also demolishes Telkom’s ability to compete in the open market place,” Goldstuck added.
Richard Hurst, senior analyst for emerging markets at Ovum, said investors in the JSE-listed company were getting shaken by government interference, and instead of returns were only seeing uncertainty, confusion and erosion of value. “The way the government voted against the non-executives has shown that government is flexing its muscle as if to say: ‘Listen, we’re the majority shareholders and you are beholden to us.’ Investors want a return for their investment which is logical, but government has a different objective and you can see that there are these two ideologies pulling in different ways, which is adding to the market confusion and uncertainty surrounding Telkom.”
With its 39.8% direct stake and a 10.6% interest through an investment by the Public Investment Corporation, government is Telkom’s biggest shareholder. Allan Gray Proprietary Ltd is another big shareholder, with a 10.3% interest, while other investors in Telkom include Old Mutual Asset Managers (3.4%); Acadian Asset Management (2.4%); Boston-based investment boutique The Boston Company Asset Management (2.2%); and STANLIB (2%). The remainder of the shareholder mix is made up mostly by institutional and private investors.
Duncan McLeod, editor of TechCentral, reported that the drama at Telkom’s AGM unfolded in spectacular style. On 25 October, as the shareholder meeting was in full swing, it was signalled to Zim that government wanted revoke its proxy (submitted five days earlier). Government was changing its vote and would do so at the AGM.
“Pinky’s resignation is related to government, because there was a lot of friction between her and the ministry,” McLeod told Daily Maverick. “Pinky’s resignation was unsurprising given the tension, although I didn’t expect it to happen quite so quickly. Her decision may have been accelerated by the minister’s behaviour in the AGM.
“The instability at the top of Telkom is a joke. Sizwe Nxasana (Telkom CEO from 1998 to 2005) did a good job, although Telkom was criticised at that time because the Americans and the Malaysians that were involved in the company were really out to maximise their investments, and they did abuse Telkom’s monopoly,” McLeod said.
After Nxasana’s exit, then-Minister of Communications Ivy Matsepe-Casaburri insisted on the appointment of Papi Moletsane, who served as Telkom CEO from 2005 to 2007 and was nothing short of a disaster. Moletsane, who was clearly out of his depth, presided over a range of bad decision-making, including the inexplicable acquisition of Nigerian telco Multi-Links, an exercise that eventually cost Telkom some R10-billion.
“Papi was fired (after only 18 months) and Reuben September (Telkom acting CEO from 2007 to 2010) eventually took over, a career technocrat if you like,” McLeod said. “Then there was Jeffrey Hedberg (Telkom CEO from 2010 to 2011) who was ex-Cell C, and an American national who is well respected.”
Hedberg is said to have left when it became apparent he wasn’t going to be offered the top job permanently. An engineer with decades of experience in telecommunications, Moholi jumped into the hot seat next. She lasted little more than a year and a half before announcing her intent to leave.
“Telkom remains a good asset, but every effort is being made by government to erode this asset,” Goldstuck told Daily Maverick. “It is not only share value that is being diminished, but the eroding of Telkom’s customer base, especially on the consumer side where we see a business in decline.”
Goldstuck said this erosion is evident on two levels. The first being the fixed-line user base, which in 2000 had 5.5-million customers but had by 2012 dropped to 3.9-million customers. “Telkom is losing more than 100,000 customers a year, and that should be treated as a massive crisis, but it is always glossed over both by Telkom and by government,” he said.
The other area of value destruction was in fixed-line broadband. “The underlying decline of fixed-line broadband has been masked by the fact that the user base has continued growing since 2003. But we have produced graphs which show that this growth is flattening. If you look at the number of new users on a quarter-by-quarter basis, you will see that this has been declining for some time now,” said Goldstuck.
The ICT analyst said Telkom’s real power was in its massive terrestrial fibre network, which spans about 143,000 kilometres. “This is its true competitive advantage in all areas, business or consumer. No other country in Africa has this kind of network and it should put us way ahead of any other country in terms of telecommunications, but this is being used by government as a deterrent,” he said.
“This massive fibre network has been used to service exchanges across the country and in turn to connect local customers,” Goldstuck said, “but this customer base is declining and the use of that fibre network is declining from a voice point of view.” Despite the voice decline, Telkom was not using this asset to grow the service offering.
“It is one thing to grow the data usage, that’s easy. But the pipes are such a strategic asset that not doing something with them to better service the consumer, small businesses, and small towns in rural areas is an indication that government’s intention with Telkom is not to benefit or to provide the greatest good to the greatest many,” Goldstuck said.
McLeod said government and other shareholders had diametrically opposed ideas about Telkom’s strategy. “Government wants Telkom to be an extension of its social services, but the company is listed on the JSE and has shareholding held by private investors and institutional shareholders.” Private investors, obviously, are less inclined to community-based initiatives.
“I am worried that the minister is actively going to damage this sector if she is not careful. She makes noises about Telkom’s commercial interests and the interests of government being compatible, but I simply don’t believe that and she hasn’t explained how that might work,” McLeod added, saying that numerous allegations of impropriety hung over Pule’s head. These include charges of nepotism and Pule’s involvement in the ICT Indaba scandal which is being investigated by the Public Protector.
“Government either needs to re-nationalise Telkom and treat it as a state owned enterprise that isn’t necessarily for profit, or sell its stake, which could be the best option. Government’s involvement in Telkom over the years has shown that it isn’t capable of running the company correctly,” McLeod stressed.
The best practice outside of socialist countries was to privatise and set up strong, efficient regulators that would create the right policy environment to foster competition and investment in infrastructure. “This is certainly what you’ve seen across the US, UK, across Europe and parts of Asia. Re-nationalising would go against best practice world-wide,” McLeod said.
An example of a telecommunications privatisation which has significantly benefitted a country is that of KT Corporation (formerly known as Korea Telecom). Founded in South Korea as a government-owned entity in 1981, it was privatised in 1989 and is said to have played a significant role in transforming South Korea’s ICT status. Goldstuck called it the “poster child of competitive strategy aimed at the greatest good for the greatest many”.
The desperate irony is that Telkom was negotiating a strategic venture with KT Corp as part of a turnaround strategy, but government scuppered the deal, in a move that many analysts described as a blow to the besieged company's recovery.
As with SAA and Eskom, South Africa seems to be lumbered with yet another “strategic asset” in Telkom that languishes as government puts the politics of control ahead of progress. Telkom will continue losing its consumer customer base, and given government’s intransigence the share price is unlikely to recover. This means Telkom won’t have the capitalisation it needs to invest in growth and everyone with an interest in the company will have to wait as government dithers then interferes some more before deciding what to do with the ailing company. DM