Telkom SA SOC Ltd. Chief Executive Officer Sipho Maseko may fire as many as 1,000 managers and says he needs to cut the approximately 21,000-strong workforce by almost a third over five years as he seeks to turn around Africa’s biggest fixed-line phone company.
The decision follows a contract with Boston-based Bain & Co. agreed about a week after he started at Telkom, which is 40 percent owned by the South African government and 11 percent held by the Public Investment Corp., the company that manages state pensions. Telkom shares rose as much as 6.3 percent and were up 5.9 percent at 32.20 rand at the close of trading in Johannesburg.
“I’ve canceled all of the bottled water, people are not happy; I’ve canceled Christmas lunches, people are not happy,” Maseko said in an interview at a restaurant in northern Johannesburg. “They’ll be saying that some of the proposals around cost cuts are too aggressive.”
Telkom, which has had five leaders since 2007, is struggling to revive revenue among consumers in a country that has leapfrogged fixed-line technology in favor of smartphone devices that are driving a boom in data usage across Africa. The Pretoria-based company is in talks with competitors to share infrastructure at its wireless business, the smallest of South Africa’s four licensed operators, to help curb costs.
The cost of running the mobile business is “a drain,” Maseko said. “If I can get it down by at least 50 percent that would be fantastic.”
“They’re looking at the cash burn, the revenue decline and if he doesn’t do this then there could be a lot more pain coming,” Bruce Main, a fund manager at Ivy Asset Management Ltd., said in a phone interview today. “That’s why the market has reacted this way.”
Telkom and Bain agreed to work together within days of Maseko’s arrival on April 1, according to an 8-page document obtained by Bloomberg and verified by Maseko.
“A good plan, actually engaging with someone, would take a few months,” Lee Manning, a London-based partner in Deloitte’s restructuring services team who handled Blockbuster Entertainment Ltd.’s U.K. administration last year, said in a phone interview on Jan. 6. “A big business would need more than a few weeks.”
Cheryl Krauss, a New York-based spokeswoman for Bain, declined to comment when contacted by e-mail.
“The human impact will be massive,” Solidarity labor union spokesman Marius Croucamp said in a text message. “If one takes that 30 percent and calculates the families involved then you get close to 35,000 people who will lose direct financial support.”
The South African government’s Department of Communications, which oversees the stake in Telkom, declined to comment immediately while the Public Investment Corp. didn’t respond to calls and e-mails seeking comment.
Maseko, 44, joined London-based oil and gas explorer BP Plc in 1997, rising to head its Southern African operations in 2008. He started at Vodacom Group, majority-owned by Newbury, England-based Vodafone Group Plc, in September 2011 and left less than a year later following complaints about his conduct on a U.S. business trip designed to reward sales agents, according to four people with knowledge of the situation.
“I’m not at liberty to say the reasons why I left Vodacom and what the settlement between myself and Vodacom was,” Maseko said in the interview, in which he said he went on the New York trip with his niece. “As much as my relationship with Vodacom didn’t work, they remain an important part of my life.”
Maseko, who at the time was chief operating officer of Johannesburg-based Vodacom, failed to attend pre-arranged meetings with sales agents on the May 2012 trip, said the people, declining to be identified due to an agreement between Maseko and South Africa’s largest wireless carrier.
Vodacom said in an e-mailed response to questions that it had nothing to add to a statement last year that said Maseko left to pursue other interests.
Maseko joined Telkom 10 months after he left Vodacom. During his period out of work, part of which was due to him being subject to contractual obligations, he spent “quite a lot of time” with management consultancy firms and visited Bain’s Johannesburg offices, the CEO said.
The challenge of restructuring Telkom spurred Maseko to start work as soon as he learned of his appointment in late March, he said. He sought advice from management consultants and within a week had received three proposals from Bain, two of which were revisions of earlier pitches, according to the document obtained by Bloomberg.
He later sanctioned a second revised version of the proposal, which was dated April 5. Final approval for the strategy was awarded in June after Bain had already begun work, a dated signature on the document shows.
The “extremely complex transformation” of Telkom will take as long as 18 months and should begin April 2, the day after Maseko joined Telkom, Bain said in the documents. Bain vice presidents Vittorio Massone and Alex Bhak were appointed to lead the project, the proposal shows. Neither were available for comment when their office was called and they didn’t immediately respond to an e-mail.
“Consultants turn stuff around very quickly,” Maseko said. “I actually started working for Telkom immediately. That is why it was easy for us to take a lot of decisions in the first week.”
Bain proposed a fee of 91.1 million rand ($8.4 million) for eight months work, excluding 15 percent expenses, value added tax and international flights. The consultants later offered a 12.2 percent discount to 80 million rand to help secure the deal.
Telkom was described as “severely underperforming” and required a review of its broadband plan, mobile strategy and capital expenditure, according to the Bain document. Revenue has declined every year since 2009, according to data compiled by Bloomberg. In addition to permanent staff Telkom uses about 3,000 people on contract.
“There is an urgent need for Telkom to address its cost base including its human capital requirements,” spokeswoman Leigh-Ann Francis said in a statement. “The reduction of staff costs has been reviewed and proposals regarding the approach to be implemented are still under consideration.”
Telkom’s shares have more than doubled during Maseko’s tenure even as the company reported South Africa’s largest-ever full-year loss for a company in an industry other than mining after it wrote down the value of assets and suspended Chief Financial Officer Jacques Schindehutte. The shares are still two thirds below their 2007 peak.
Telkom’s first-half profit, excluding one-time items, rose 41 percent to 773 million rand in the six months through September. The company wants to improve high-speed broadband in Africa’s biggest economy, where average Internet speeds lag those of Cambodia and Tajikistan, according to U.S.-based data provider netindex.com.
Maseko is trying to boost revenue and has held talks with media companies including Comcast Corp., Bertelsmann SE, Naspers Ltd. and Netflix Ltd. about using Telkom’s fixed-line networks to deliver content in Africa, he said.
“I’m accountable for the strategy, I’m accountable for the development of the strategy,” Maseko said. “If the strategy fails, I’m the one who’s going to get shot. It’s me.”