Dial C for Chaos as State Spurs Telkom Exit: South Africa Credit
Telkom SA Ltd. (TKG) is suffering a management exodus as the South African government increasingly intervenes in the phone company’s business, risking a downgrade that may bring its credit rating to within one level of junk.
Nombulelo Moholi, 51, the fifth chief executive officer in nine years at Africa’s largest fixed-line operator, quit this week. Chairman Lazarus Zim resigned after its annual general meeting on Oct. 24, during which the communications minister blocked the re-election of four directors. Telkom has six board members left following the resignation of three directors since Oct. 1, less than the eight required in the company’s bylaws.
The premium investors demand to hold Telkom debt due February 2020 over similarly dated government bonds rose to the most in four months after Moholi gave notice Nov. 5. Yields on the notes have jumped 18 basis points from a record low Sept. 26, compared with a 16 basis point drop in JPMorgan Chase & Co.’s EMBI TMT Blended Yield Index. Standard & Poor’s said two days ago it may downgrade Telkom because of an unclear strategy.
“It almost beggars belief that you have a large corporate that virtually has no management,” Simon Howie, head of South African and frontier-market credit at Investec Asset Management, said by phone from Cape Town Nov. 6. “We’ve got to a point in Telkom where news flow is worse than a worst-case scenario. There is certainly the potential for credit spreads going out.”
Sibusiso Sibisi, one of the non-executive directors not re- elected last month, doesn’t “have the foggiest clue” on why the government blocked his appointment, he said yesterday in e- mailed statements. Sibisi is the chief executive officer of the Council for Scientific and Industrial Research and a member of the boards of Murray & Roberts Holdings Ltd. (MUR), a construction company.
S&P, which rates Pretoria-based Telkom BBB, two notches above non-investment grade, lowered its outlook on Telkom to negative from stable in December, citing a potential drain on cash to maintain the fixed-line business as it simultaneously expands its mobile-phone operations. The company will use Telkom’s fiscal first-half earnings, scheduled for release on Nov. 19, to assess its rating, Guillaume Trentin, a Paris-based analyst at S&P, said by phone.
“All of the management changes that we have seen in the past years clearly has certainly delayed and affected the implementation and execution of Telkom’s strategic priorities,” he said on Nov. 6. “We need to take a view on whether we downgrade this company to BBB- or if we still think they can preserve a BBB.”
Increased competition in South Africa and a failed five- year expansion into Nigeria that cost the company 9.6 billion rand ($1.1 billion) has cut profit before one-time items every year since 2006 at Telkom, 39.8 percent owned by the government.
“It is the responsibility of the board and the management team to balance the interests of all shareholders,” Communications Minister Dina Pule said in an e-mailed response to questions yesterday. “This means, amongst others, ensuring that the company has a stable leadership team and a reliable experienced workforce.”
It is Telkom’s duty to call a special board meeting to appoint more directors, Pule said. The government is working with other shareholders and the company to fill vacancies, decisions on which will be announced within weeks, she said.
“Telkom will continue to access funding from capital markets when the timing is appropriate and the funding need arises,” the company said in an e-mailed response to questions. Telkom’s board will look for a new CEO once it has filled the empty board seats, it said Nov. 5.
Telkom said in June the Cabinet won’t back the sale of 20 percent of Telkom to South Korea’s KT Corp. (030200) because the company is a strategic asset and must play a developmental role. Telkom appealed to the government to reconsider the deal, which could have brought broadband expertise and a 3 billion rand investment, former chairman Zim said at the AGM last month.
The company needs a partner to help it reorganize and compete, Elias Masilela, the CEO of the Public Investment Corp., a state-owned money manager which owns 10.6 percent of Telkom, said on Johannesburg’s SAfm radio station Nov. 6.
“The vacuum of leadership at the top and what looks to be a lack of independence to get on with the job without the influence of their big shareholder seems to be stifling their ability to make real strategic changes,” Craig Pheiffer, general manager of investment at Absa Asset Management Private Clients in Johannesburg, said by phone Nov. 6. “There’s no clear strategy in place about how they’re going to rebuild.”
Profit before one-time items in the six months through September fell more than 65 percent after boosting provisions for an antitrust fine, Telkom said in a Sept. 20 statement. The company was fined 449 million rand on Aug. 30 for abusing its market dominance. The Competition Commission has asked for a larger fine to be imposed on the company.
Telkom’s shares fell for a fourth day, retreating 1 percent to 17.03 rand at 10:35 a.m. in Johannesburg, extending losses this year to 41 percent. That compares with a 17 percent gain in the FTSE/JSE Africa All Share Index. (JALSH) The rand weakened 0.2 percent to 8.6536 per dollar.
Yields on Telkom’s 2.5 billion rand of eight year, 6 percent bonds rose two basis points to 6.64 percent when Moholi, appointed in March last year, announced her resignation. That widened the gap over the government’s 7.25 percent notes due January 2020 to the highest since July 19. Yields on the state’s securities rose one basis point, or 0.1 percentage point, to 6.48 percent today.
“What you don’t like as a credit investor is deteriorating credit,” Investec’s Howie said. “It’s just not what you want in your portfolios.”