April 14, 2009 / 2:35 PM / 9 years ago

S.Africa's Telkom faces uphill task on revamp

* CEO’s ability to execute strategy questioned

* Needs to prove can integrate new assets, create value

* Doubts on how Telkom will replace lost mobile revenue

By Gugulakhe Lourie

JOHANNESBURG, April 14 (Reuters) - Africa’s biggest telecoms group Telkom (TKGJ.J) needs a dramatic overhaul if it is to keep profits rising without star unit Vodacom and, based on its poor track record so far, management seems unlikely to deliver.

Already facing dwindling revenue as mobile operators and a new fixed-line rival eat into its subscriber base, the former South African monopoly is about to lose earnings driver Vodacom in a deal with Vodafone (VOD.L) and its own shareholders. []

It needs new revenue streams fast and CEO Reuben September has vowed to reinvent Telkom as a high-end technology provider for businesses and a pan-African phone and Internet group.

Investors like the idea, especially given huge potential for Internet demand on the poorest continent. But after management mishaps, failed ventures and deals that have yet to yield dividends, many wonder whether September and his team can execute.

“We are fairly comfortable with the strategy. For me execution of that strategy will remain a risk,” Rajay Ambekar, a Cape Town-based telecoms analyst at Cadiz African Harvest said. “That’s where Telkom has always disappointed.”

Telkom is the dominant fixed-line phone firm in Africa’s biggest economy, but revenue at its core business is under pressure. Fixed-line sales edged up just 2.8 percent last financial year and growth is expected to dry up altogether soon.

Out of Telkom’s first-half revenue of 29.9 billion rand

($3.3 billion), mobile accounted for 43.5 percent -- a portion that will disappear when Vodacom is spun off in May.

Shares in Telkom have fallen about 4 percent since January, roughly in line with the JSE Top-40 index .JTOPI of blue-chip stocks, propped up by the imminent unbundling of Vodacom.

The stock could fall by 50 percent after that and management will have to persuade investors who had previously bought Telkom for exposure to Vodacom not to sell.

“Right now Telkom is offering value and the share price may drop after the unbundling, but there might still be good value,” said one analyst. “No one knows how the market will react to the unbundling.”


September is a former chief technology officer with a good handle on operations, but some investors wonder if he has the strategic vision to revamp the firm.

He has vowed to build on Telkom’s vast network to provide comprehensive IT services to businesses and plans to roll out a combination of fixed and wireless services for corporate and high-end residential clients.

Some analysts say this is too little too late given the strength of mobile operators such as MTN (MTNJ.J) and Vodacom.

“Traffic is rapidly migrating to the mobile networks and in a country where fixed-line penetration is low ... but mobile penetration high, we are not convinced that a fixed-to-mobile convergence strategy is anything other than a rearguard action,” Martin Mabbutt, an analyst at brokerage Nomura, said in a note.

“The record of telcos making money out of information communications and technology is not good.”

September has appointed respected managers to key posts such as chief financial officer and head of the international business, but the new team needs to earn its stripes fast and September himself seems aware of the pressure to deliver.

    “A strategy is all good and well ... The important dimension is having the right capacity to be able to execute,” September told reporters this month, referring to the new appointments. Other incumbents such as Britain’s BT (BT.L) have struggled with the transition from phone monopoly to cutting edge technology company. And Telkom also has a sketchy track record on making bold strategic moves.

    In a step meant to pre-empt the drop in revenue from the Vodacom sale, Telkom in 2007 April unveiled an ambitious plan to break into pay-TV by creating its own broadcaster.

    It hired top reporters for its own news channel and secured 7.5 billion rand of funding before realising owning content was too expensive. Telkom wrote down 217 million rand and said last month it planned to close the unit.

    The project made investors nervous about management’s ability to make the right decisions and investors voice similar concerns about its plan for Africa.

    Telkom’s Nigerian private operator Multi-Links, touted as a big money-spinner thanks to Nigeria’s vast untapped telecoms market, is still losing money two years after it was bought. And Kenya’s ISP unit Africa Online reported an operating loss of 8 million rand in 2008, two years after Telkom bought it.

    Analysts say neither of these assets can replace Vodacom.

    “These steps do not instil confidence that this is a management that understand the market and exactly where they want to go,” said Jan Meintjes, a telecoms analyst at Cape Town-based Gryphon Asset Management.

    “So if you want to give Telkom management benefit of the doubt, they need to prove that they can buy assets and integrate them effectively (and) create value. As yet, they haven’t done that.”

    (Editing by David Holmes)

    ((gugu.lourie@thomsonreuters.com; +27 11 775 3162;))

    (For full Reuters Africa coverage and to have your say on the top issues, visit: af.reuters.com/)

    ($1=9.218 Rand) Keywords: TELKOM/STRATEGY

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