Behind closed doors

Telkom`s plan to sell parts of its business to MTN and Vodafone is unclear and unsubstantiated. Brainstorm  looks at a number of potential scenarios should Telkom have its way.
1 November 2007

If you`ve been following media reports over the past two months, chances are good that you would have noticed some speculation in the market centred on Telkom`s plans for its stake in Vodacom and a possible deal with MTN. Unfortunately, you`re not going to find any confirmed facts in this article – news on this topic is extremely thin at the moment, since all of the companies are under cautionary. Speculation and opinion, on the other hand, is not.

The theory so far is that Telkom is looking to unload its shareholding in Vodacom to Vodafone, which has been chomping at the bit to gain a larger stake in the local mobile telco. This part of the theory makes sense. Besides making good money for Telkom, its shareholding in Vodacom hasn`t exactly seen many synergies being developed between the two companies. It`s not through lack of trying since Telkom and Vodacom have been wanting to roll out converged services for some time now.

Quite simply, I can't see the government allowing it. And I don't believe that selling the infrastructure business and getting involved in a purely services-focused business would be the right thing either. William Hahn, Gartner
The second part of the theory is the confusing bit. We know that Telkom and MTN are in talks; and popular opinion suggests that it`s about the possible sale of Telkom`s infrastructure business to MTN (read this month`s cover story on page 26 for more insight – Ed).

This may go down in a number of ways: the first is for Telkom to sell MTN its fixed-line infrastructure and get out of the infrastructure game altogether. Telkom would then stick to the provision of converged services like voice, video and data over all kinds of infrastructure, which it will rent from the most appropriate provider.

A second theory suggests that Telkom will enter into some kind of cross-ownership deal with MTN, which will see MTN gain access to some of Telkom`s fixed-line infrastructure and, in turn, Telkom gain access to some of MTN`s mobile infrastructure.

The first half of the story, specifically that Telkom will sell its stake in Vodacom, comes as no surprise to Gartner`s William Hahn, principal analyst in the carrier operations and strategies team.

What makes sense?

“There`s no reason why Telkom shouldn`t be trying to get some cash out of [the Vodacom] investment at this stage,” he says.

Vodafone at a glance

Listed on the London and New York Stock Exchanges, Vodafone had a market capitalisation of approximately £88 billion at 3 July 2007. The company has in excess of 66 000 employees. It has approximately 206.4 million registered proportionate customers and approximately 630.3 million venture customers.
In terms of its global operations, Vodafone has equity interests in 25 countries (Vodacom South Africa being one of these) and partner networks in a further 40 countries.
The company estimates that it has in excess of 32.3 million Vodafone Live active devices on its networks and an additional 7.6 million registered  Vodafone Live venture devices.
It estimates that the company had 15.9 million 3G devices at the end of March 2007 and that an additional three million Vodafone Live with 3G and Vodafone Mobile Connect 3G/GPRS data card devices existed.

“The rumour is that the companies haven`t been happy with that relationship for some time now. Therefore, cleaning its portfolio up a little would be good for Telkom. And we all know that Vodafone would love to gain control of the leading mobile carrier in South Africa. However, I don`t think that fixed-line carriers can afford to not have a mobile investment somewhere since that`s what the trend has been in more developed markets,” he says.

For this very reason, Hahn says it`s surprising to consider that Telkom would even be allowed to sell its fixed-line infrastructure business. “Quite simply, I can`t see the government allowing it,” he says. “And I don`t believe that selling the infrastructure business and getting involved in a purely services-focused business would be the right thing either. The popular belief in the market is that the money is in the services.”

Hahn points out that Gartner has found there`s no replacement for the synergies that owning infrastructure and operations can bring to the table in delivering services.

“Owning your own infrastructure is where the operational savings come from,” he adds.

Even British Telecom (BT), which came under massive pressure from its government, had to separate the infrastructure and operational parts of its business, but chose to keep them as a single entity. Today, they`re run as separate parts of BT`s business, but still owned centrally.

Cross-shareholding likely

Hillel Shrock, business solutions director at Internet Solutions, agrees completely with Hahn`s comments.

“I honestly don`t see the rationale for Telkom to entertain selling its infrastructure business to MTN. Trying to leverage the convergence between fixed and mobile, services that the companies could gain access to by working together, does make good sense. In the same light, where MTN has achieved massive success outside of South Africa, Telkom hasn`t been quite as successful. A deal with MTN could help it unlock opportunities in Africa,” he says.

I honestly don't see the rationale for Telkom to entertain selling its infrastructure business to MTN.
Hillel Shrock, Internet Solutions
Schrock says that word around the campfire is that Telkom isn`t looking to sell its infrastructure to MTN at all, but rather put together a cross-shareholding deal with MTN for its infrastructure, bearing out market rumours and hearsay that Brainstorm  has picked up recently.

“We also need to consider that these two companies have very different cultures. Although they`re both telcos, it`s unclear whether the company cultures would work well together,” he says.

Considering what the possible implications for the local market would be, Shrock believes that most players in the ISP space, for example, are trying to gain greater control over the infrastructure they use when delivering services to customers.

“We`re looking for more alternatives so that we are able to roll our services out using appropriate infrastructure. I know that we`re not alone in our desire for more competition at an infrastructure level; we [don`t want] consolidation,” he says.

The market needs more alternatives; it would be disappointing to see further consolidation.