Telkom Slumps as Talks Dissolve

South African incumbent's valuation takes a whack as takeover talks with MTN and Vodafone fall through

November 29, 2007

3 Min Read
Telkom Slumps as Talks Dissolve

South African incumbent operator Telkom SA Ltd. (NYSE/Johannesburg: TKG) saw nearly 8 percent of its market value wiped out Wednesday following its announcement that merger talks with MTN Group Ltd. and Vodafone Group plc (NYSE: VOD) have ended.

Telkom, one of the biggest emerging market carriers in the world by revenues, saw its share price fall by $7.05, about 7.6 percent, to $85.70 after it told investors that talks to merge its fixed line operations with MTN, another of the world's leading emerging market operators, had been terminated. (See Top Ten: Emerging Markets Carriers.)

"After detailed investigations into the strategic, operational and regulatory aspects of such a transaction, the parties were unable to conclude a transaction in the best interests of their respective shareholders. This decision was driven primarily by matters related to the anticipated costs and benefits of the implementation of the transaction," Telkom officials noted in a statement.

The news sent MTN's share price up by 7.6 percent to 129.50 Rand ($18.98) on the Johannesburg Stock Exchange.

The breakdown of those talks also brought an end to Telkom's discussions with mobile giant Vodafone. The two carriers jointly own mobile operator Vodacom Pty. Ltd. , which has operations in South Africa, Tanzania, the Democratic Republic of the Congo, Lesotho, and Mozambique.

Telkom had hoped to sell a chunk of its 50 percent stake to Vodafone -- making the global operator the majority owner -- and publicly list the remaining shares.

However, Telkom noted that "as discussions with Vodafone regarding Telkom's investment in Vodacom were subject to agreement being reached with MTN, Telkom shareholders are advised that discussions with both MTN and Vodafone have been terminated."

Telkom says that, in its efforts to boost shareholder value, it will continue to "pursue all options to enhance the Company's strategic positioning." Talks with Vodafone are expected to resume, this time without any link to the divestiture of Telkom's fixed assets.

But it's back to the drawing board for Telkom SA regarding its fixed line strategy, which, whether it goes it alone or not, will be based on boosting its broadband service uptake and investing in an IP-based next-generation network.

"The evolution to an IP centric network is a business imperative. It is vital that we continue our investment in our network," the carrier noted in its latest full-year report. To increase broadband penetration, Telkom expects to spend three years "enabling the network for broadband services," then start migrating services to the next-gen framework. "Depending on thecustomer demand and profitability, this process is expected to be completed by 2015," the report states.

The breakdown in talks follows a period of weeks marked by management upheaval and poor financial news.

On November 19 the carrier announced a near 5 percent fall in half-year operating profits, and a 15 percent drop in earnings, despite a rise in revenues of more than 8 percent to 27.2 billion Rand ($4 billion). (See Telkom SA Reports H1.)

Just last week Telkom announced that its COO, the superbly named Reuben September, had been handed the role of CEO on a full-time basis. September had been acting CEO since April, when the company's board sacked the previous chief, "Papi" Molotsane. (See Telkom Names CEO.)

And in October, Telkom's CFO, Kaushik Patel, quit his job.

For more details on Telkom SA's African expansion strategy, see page 9 of Top Ten: Emerging Markets Carriers.

— Ray Le Maistre, International News Editor, Light Reading

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