Posted by Belinda Anderson on
Some fund managers see Telkom's decision not to pursue the privatisation of Nigeria's state-owned fixed-line telco Nitel as a missed opportunity, but most are confident that management walked away from risk or avoided overpaying.
Some fund managers see Telkom's decision not to pursue the privatisation of Nigeria's state-owned fixed-line telco Nitel as a missed opportunity, but most are confident that management walked away from risk or avoided overpaying.
Khulekani Dlamini, fund manager at Renaissance Asset Management, is rubbing his hands together for the possibility of a special dividend in the absence of a value-adding expansion opportunity. But, even Telkom's ordinary dividend is anticipated to be a windfall this year. Dlamini says the market is expecting a dividend north of R9 a share - more than last year's ordinary and special dividend combined.
Dlamini says given that the true nature of the potential investment in Nitel was not clear, it would be difficult to declare it a positive or negative thing that the opportunity did not come off. But, if it had, he would have been far more comfortable for Telkom to have a management contract with the option of taking an equity stake in the operator at a later stage, than for it to take an outright equity investment at the outset.
There were six bidders short-listed to make an offer for the 51% stake in Nitel, including Telkom and MTN, but only Egyptian operator Orascom and a consortium named NewTel reportedly made an offer. And, although Orascom was the higher of the two, the Nigerian government put its nose up to the $256,5m bid, saying this was far below its reserve price.
Investec Asset Management's Susan Butler says although it is disappointing to see a potential expansion opportunity closing for Telkom, without knowing the detail of the price it might have offered or the structure of the deal, she's neutral on whether its withdrawal is a positive or a negative thing. Butler says in the light of limited growth opportunities back home, it would welcome Telkom exploring potential opportunities that came along. Telkom has said previously it could look at opportunities in countries like Kenya and the DRC. But, as a shareholder, Investec Asset Management would assess the merits of these on a case-by-case basis, Butler says.
She says there's nothing to indicate Telkom's management team has not adopted a proactive stance in the local market, but the fact is there are limited growth opportunities. 'We're adopting a bit of a wait-and-see approach at this stage".
Irnest Kaplan, MD of Kaplan Equity Analysts says because Telkom is facing competition at home, it should be pursuing opportunities in other markets. Kaplan believes Telkom has the capital and a wealth of management skills just below the executive layer that it could use to venture elsewhere in pursuit of revenue. But, given the lack of technology in Africa, Kaplan believes Telkom would have to position itself somewhere in between being a fixed / wireless operator. He doesn't believe that investors will view Telkom expanding into other countries in a negative light, as long as it does so at the right price.
Despite the imminent threat of competition to Telkom's fixed line business, the share price has continued to run, climbing to a new high of R147 on Tuesday afternoon. Kaplan puts this down to international interest, given that emerging market telecoms companies are trading on relatively cheaper multiples than their developed market counterparts.
Another investor, who preferred not to be named, said it was probably more of a relief that Telkom had not pursued Nitel. This was because it faced lots of challenges in the local market, so why acquire a fixed line operator in another market. 'Africa is not a fixed line story," he says.
The fund manager also said from his previous interactions, Nitel's management team was highly unimpressive. From the perspective of Telkom being able to go in and make a big difference this might have been considered a positive, but on the other, this meant the risks were very high. It was also questionable whether Telkom had the management team available to pursue such opportunities, he said.
Coronation fund manager Pallavi Ambekar says she's confident that Telkom's management would have pursued any value-enhancing deal; so to have pulled out demonstrates that it did not believe pursuing the opportunity would have been in the best interests of shareholders. On Telkom exploring other opportunities outside of South Africa, Ambekar said, like with any other company listed on the JSE, her institution would support these if the group undertook it at the right price and made sure not to take its eye off the ball in the existing operations.
She holds a similar view in the wake of Telkom deciding not to pursue an offer for Business Connexion. 'For me both deals have signified that if the company is not comfortable with a deal, it won't go ahead," says Ambekar. This was particularly pleasing given that Telkom could afford to do the Business Connexion deal, but demonstrated it would not pursue an opportunity at any cost.
Dlamini, on the other hand, is disappointed that Telkom did not buy Business Connexion.
The transaction, he says, would have had a marginal impact in terms of earnings, but from a strategic point of view, would really have thrust Telkom up the value chain. He believes Business Connexion is a 'fantastic business", from which Telkom could have extracted significant synergies over time. He's not as concerned about the risk that Telkom could have overpaid: 'Even at R8 or R8,50, I don't think it would have been overpaying," he says.
Business Connexion CEO Peter Watt said this week that although this round of the bidding was over, the process seemed far from over. The interested parties had simply not been willing to cough up for the group's blue sky potential, he said.
Dlamini says he hopes the deal comes around again. But, he says Telkom would first need to resolve some of the anti-competitive issues that had been raised by various market players (see Spoiling for a fight, Tuesday 13 December 2005). 'I'd love for this to come back…it would be a proper value-adding transaction with little risk." While some fund managers would prefer the organic route, Dlamini believes it would be very difficult for Telkom to build an information and communication technology (ICT) services capacity from scratch.