June 7 (Bloomberg) -- Telkom SA Ltd., South Africa’s worst-performing stock over the past five days, will struggle to persuade investors to pump more money into the company with government as its main shareholder.
The Cabinet last week blocked the sale of 20 percent of Telkom to KT Corp., South Korea’s biggest phone and Internet provider, for 2.7 billion rand ($324 million). The government, which owns 40 percent of Telkom, is considering a rights issue or an increase in debt to help fund a return to profit for Africa’s largest fixed-line operator, Communications Minister Dina Pule said on June 5.
“There has been so much political interference that the necessary steps” for Telkom to “become economical have not been taken,” said Omri Thomas, a fund manager at Cape Town-based Abax Investments (Pty) Ltd., which helps manage 14 billion rand for Nedgroup Investments’ Rainmaker Fund and does not hold Telkom. “Investors may not want to put further capital in the hands of management.”
Increased competition in South Africa and a failed expansion into Nigeria has cut profit excluding one-time items at Pretoria-based Telkom every year since 2006. South Africa’s Competition Tribunal will in October begin hearings into an eight-year-old complaint that Telkom abused its domestic market dominance, which could result in a 3.25 billion rand antitrust fine. Telkom has denied the allegations.
“Telkom needs a helping hand but we are not convinced of government as a shareholder,” Johan Snyman, an analyst at Renaissance Capital’s South African unit, said in a June 4 note. “If government remains a shareholder we argue it would be better for Telkom to be delisted and recapitalized by government.”
Telkom sold shares at 28 rand each in a March 2003 initial public offering on the Johannesburg Stock Exchange, the only IPO of a state-owned company since the end of apartheid, with the securities peaking at 90.42 rand on Sept. 3, 2007. Pinky Moholi last March became Telkom’s fifth chief executive officer since its IPO. In February it asked Chairman Lazarus Zim, the company’s fourth since listing, to stay until Aug. 31, 2013.
“Telkom has been so horrendously managed over the years that the KT deal was seen as a way to ensure more competent management was put in place,” Thomas said in a June 5 phone interview. A rights offer will dilute shareholders and probably be at a “huge discount,” he said. “Because of Telkom’s current cash restrictions, the option of raising debt would probably mean Telkom has to pay high interest costs.”
Shares to Fall Further
The stock gained 0.9 percent to 20.68 rand at the close in Johannesburg, paring its decline over the past five days to 9.7 percent, the worst performer in the 162-member FTSE/JSE Africa All Share Index, which has gained 2.3 percent. Earnings per share from continuing operations in the year through March probably fell as much as 100 percent, Telkom said on June 4. Three days earlier, Telkom was removed from the MSCI South African Index.
Telkom’s shares have slid 46 percent since May 25, 2009, when it spun off its stake in Vodacom Group Ltd., the largest provider of wireless services to South Africans. Vodacom, based in Johannesburg, has gained 73 percent over the same period.
“The share will probably decline further,” Khulekani Dlamini, head of research at Cape Town-based Afena Capital, which manages about 20 billion rand, said June 5.
The company may need to consider selling off parts of its businesses to become more focused, he said.
“If it cut its dividend, investor interest in the business would diminish more,” Dlamini said. “Even if Telkom used its cash flows as funding, a sizable amount of money would have to come from equity or bondholders.”
The company has paid dividends each year since 2004 with special cash payments in 2005, 2006, 2007, 2009 and 2010. It may pay a 1.50 rand final dividend, according to Bloomberg dividend estimates.
Telkom must inform government of its funding needs, Pule said in an interview in Cape Town on June 5, adding that KT’s offer was too low to meet the company’s needs.
Telkom will speak with the communications minister to discuss the decision not to back the KT offer, Pynee Chetty, a Telkom spokesman, said by phone on June 4. He didn’t respond to an e-mailed request for comment yesterday. Government spokesman Jimmy Manyi didn’t return a mobile-phone text message seeking comment yesterday.
KT on May 8 offered to pay 25.60 rand a share for the Telkom stake, a reduced price from an Oct. 14 offer of 36.06 rand a share. KT isn’t discussing raising the price, Yung Kim, senior executive vice president for strategy planning and investment at Seongnam, South Korea-based KT, said June 5.
Telkom needs an urgent turn-around strategy to fulfill the country’s goal of rolling out broadband infrastructure to all citizens in the next seven years, the government said June 1.
Telkom’s fixed-line traffic, measured in millions of minutes, dropped 70 percent from September 2003 to September 2011, according to Bloomberg calculations from Telkom earnings statements, while the number of fixed-lines declined 15 percent. Vodacom and MTN Group Ltd., the nation’s largest mobile-phone operators, were last year increasing data revenue three times faster than Telkom, which in 2010 started its 8ta mobile-phone unit.
The fixed-line operator may need to turn itself into a wholesaler that sells Internet and voice packages to other companies that then package these for retail and business customers, Dlamini said.
It may need to reduce capital expenditure or cut spending on its mobile offering, said Thomas.
“The unbundling from Vodacom and attempt to establish its own mobile company in a highly competitive market showed a lack of vision,” Sameera Cassim, an analyst at Afrifocus, who has a hold recommendation on Telkom, said by phone from Cape Town. “The company has been like a greedy child that tried to grab too much and ends up with nothing.”
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