South Africa's Telkom: a fighting chance?

Telkom Direct stores: a vital channel to market as the company faces challenging times?

DevelopingTelecomsWatch is picking up lots of chatter today about Telkom, the incumbent wireline operator of South Africa. This started when this morning's daily roundup from TeleGeography included the news that the company is planning to re-enter the mobile space in 2010 after only a brief period with no cellular presence.

Until almost exactly one year ago, Telkom and Vodafone had each owned 50% of Vodacom, the pan-African mobile operator with 35 million customers in South Africa, Tanzania, Lesotho, Mozambique and the Democratic Republic of Congo. Earlier this year, the UK-headquartered mobile giant secured a controlling interest in Vodacom with the purchase of an additional 15% stake from Telkom. The remaining 35% owned by the South African incumbent was listed on the Johannesburg Stock Exchange and unbundled to the company's shareholders.

When plans for this transaction were first announced late last year, Lloyd Gedye of South Africa's Mail & Guardian reported the stated rationale for Telkom's sale of its stake in Vodacom and noted that many analysts "had expressed skepticism at Telkom's ability to make a success of going it alone in the mobile space and have questioned how Telkom will survive without the Vodacom cash cow."

Back in November 2008, then, Gedye wrote that Telkom CEO Reuben September was arguing that the deal would unlock significant value for the company's shareholders because its fixed-line business had "been undervalued while it clung on to its 50% stake in Vodacom".

How much validity is there in that notion of Telkom's wireline property being undervalued? The notion is, at the very least, open to question according to An Ovum note issued this week in response to Telkom's announced plans to roll out its own mobile services. Ovum examine the background to this strategy and observe that fixed-line penetration (currently under 9%) is continuing to fall in South Africa so "mobile is clearly the communication mode of choice, and this is where [Telkom] needs to be for its customers."

However, the note continues, establishing a new mobile operation in South Africa won't be easy, as mobile penetration is already above the 100% mark and because Telkom will be competing with two large, well-established players in Vodacom and MTN.

A third mobile operator, Cell C, has achieved a 15.57% share (according to WCIS) of the country's mobile market since its commercial launch in late 2001. For other mobile service providers, South Africa has offered a very challenging competitive environment. Back in March, in an article on the prospects for MVNOs in both Africa and India, DevelopingTelecomsWatch noted that Virgin Mobile South Africa had failed to capture even 1% of the country's mobile subscriptions by the end of 2008. The significance of the recently-launched CDMA mobile offering from Neotel, Telkom's principal challenger in the fixed-line arena, remains to be seen.

While Ovum's note politely points out the level of challenge facing Telkom's proposed new mobile offering, others have responded with far less restrained language. An article by Tiisetso Motsoeneng of Reuters today quotes one analyst who certainly pulls no punches.

"To be targeting the retail market in that industry, I think it will be suicide for Telkom," Jan Meintjes, an analyst at Gryphon Asset Management said. "I fail to see how a converged strategy of fixed and mobile is going to be earning significant margins," Meintjes said. "Unless they can show to the market that there's a specific niche that they're targeting and how they can exploit that in terms of earning margins on that business that will give them an accepted ROE on their capital expenditure, I don't see how that can be value enhancing."

The Ovum note, however, reminds us that in South Africa, Telkom claims not to be starting a mobile network operation from scratch. The note points out that the group already has fixed core network assets, which are used by both Vodacom and MTN for backhaul, and an established channel to market through over 134 Telkom Direct shops. Ovum contend that Telkom can choose to "develop a new brand and associated lifestyle concept to target some of the high-spending customers". Also, the Ovum note continues, Telkom could potentially have greater appeal to enterprise customers due to an ability to bundle services across fixed and mobile networks.

Lloyd Gedye's article late last year indicated that another use of the Telkom's Vodacom windfall might be to acquire a number of new mobile licences in numerous African countries. These would be in addition to the company's existing interest in Nigeria. According to Candice Jones of ITWeb, however, Multi-Links, the Nigerian telco in which Telkom has had a controlling interest since 2006, "is in dire straits, knocking Telkom's annual results set with a R1.7 billion net loss."

Let's see if this difficult experience discourages Telkom from further international expansion. My sense all this year is that African mobile markets are more likely to consolidate than they are to offer rich opportunities for new entrants.

While mobility in South Africa offers a new source of revenue for Telkom, Ovum argue that any new revenue streams from mobile - or from enhanced ICT services currently being developed - "are unlikely to significantly bolster its financials in the near term." Of more immediate concern, Ovum contend, is Telkom's rising cost base. Ovum's note expresses the belief that by implementing best-practice approaches in its own transformation, Telkom is giving itself a fighting chance in the challenging times ahead of it.

South Africa's Telkom: a fighting chance?

Zain (Africa) Speculation Watch: Episode 12

Zain share price: massive spike since the rumour mill started turning

One loyal reader has suggested it's high time that this blog revisited its most regularly explored theme - the ongoing not-so-mini-series that is Zain (Africa) Speculation Watch.

Note the parentheses around the word 'Africa', a set of punctuation marks that, for good reason, crept into the title of this series in Episode 11. Bracketing 'Africa' in this way was to denote that while this continuing investigation into developments at the Kuwaiti MEA telecoms group was initially focused on the rumours about the sale of Zain's African operations, the focus needed to become a bit wider, i.e. speculating about the future of the whole company. This was due to the UAE's Etisalat informing reporters of its interest in buying a 51% stake in the Kuwaiti group.

Since then, that loyal reader I mentioned has urged me to take note of a couple of possibly quite significant elements of the Zain story.

The first of these is the news that a major Zain shareholder is likely to consider selling its stake in the telecoms company if it receives the right price. That shareholder, the Kuwait Investment Authority (KIA) (the Gulf state’s sovereign wealth fund), owns a 24.61% stake in the operator. According to Kuwaiti newspaper al-Rai, "the KIA has no objection to discussing any offer to buy its stake in Zain whether made by the UAE’s Etisalat or others under the condition that the offer would be serious and with attractive returns."

That, then, looks like pretty positive news for the Emirati telecoms group if its interest in Zain really is very strong.

The other bit that my friendly reader brought to my attention is much more cloak-and-dagger.

My friend tells me he's heard whispers that "the whole Zain thing" has been a ruse set in motion with the sole intention of driving up the Kuwaiti group's share price. By way of support for this assertion, my pal urged me to take a look at Zain's stock chart from March to July. "It's quite amazing what transpired", my correspondent reminds me. Kuwaiti blogger 'Alpha Dinar' concurs, having noted back on July 13th that Vivendi’s USD 12 billion rumored proposal to acquire Zain’s African operations "has stolen headlines for the past few weeks, sparked large volumes, and resulted in a huge spike in Zain’s stock price."

I asked my correspondent whether he felt that the likes of Vivendi (and other rumoured Zain Africa suitors like France Telecom) could really be tempted into declaring their interest and thereby enabling any such ruse to succeed. My friend's response: "If the new buyers weren't really aware of the game, and if the game was well-played, I don't think they would have been able to keep the genie in the bottle. In any case, if Party A wanted to manipulate the share price, they would be the ones leaking and Party B wouldn't have been able to stay in stealth mode. I don't know how likely it is. I'm not saying that's what happened. I'm just saying that the price did indeed jump up quite a bit, and despite the talks having failed, it hasn't gone down that much at all."

My correspondent concedes that games of the kind being alleged here are not terribly common in Bahrain or Kuwait. He asserts, however, that this is a game often played in other parts of the world and that the fact remains that "the stock was even and then - BOOM - a ninety degree angle."

Who knows? Not me, that's for sure.

One company whose talks with Zain could be said to have "failed" is Vivendi, which announced on July 20th that it was "interrupting" the discussions. No reason was given at the time. Since then, however, Kui Kinyanjui, writing for Kenya's Business Daily Africa, has alleged that the French telecoms and media conglomerate's interest cooled following a disappointing trip to her home country. Kinyanjui writes that "a dozen senior Vivendi officials jetted into the country to view close hand one of the Zain operations their company hoped to purchase" and that "they came, they saw, were disappointed, and in the process, a multi-million dollar deal was scuttled." The article describes Zain's struggle to compete with Kenya's market-leading cellco Safaricom and cites unconfirmed information from Kenyan sources which indicates that Zain is "keen to sell its Kenyan, DR Congo and Sierra Leone units, and could consider separate bids from disparate telecommunications firms for those operations."

Such rumours of Zain breaking up its African portfolio and selling off operations piecemeal have been far less prominent than stories of that whole portfolio being sold to a single buyer. One prospective purchaser, however, has expressed an interest in buying up only those Zain-owned opcos which would complement its own existing African footprint.

In a recent Reuters note on France Telecom's need to limit margin erosion, Finance Director Gervais Pellisier is quoted as saying that the French incumbent telco "might look at some of the African assets of Kuwait's Zain if the latter decided to sell them in parts." Any willingness on the part of Zain to consider a piecemeal sell-off of some African assets - as alleged by Kui Kinyanjui - would presumably, then, be music to the ears of Mr. Pellisier and his colleagues.

Were a sale of Zain itself or just of Zain's African assets to go ahead, one stumbling block could come in the form of legal action brought by Econet Wireless, the telecoms group led by Zimbabwe-born businessman Strive Masiyiwa. As a recent Guardian article reminds us, in late 2000, Masiyiwa led a consortium that won a licence to operate a mobile phone network in Nigeria. Econet Wireless had a 5% stake in the consortium and claims it had a right of first refusal to buy out the rest of the network in the event of any bid emerging. A bid did emerge from Mo Ibrahim's Celtel International, but, writes the Guardian's Richard Wray, "a series of legal obfuscations blocked Econet from ever getting the chance to bid."

Celtel was, of course, subsequently acquired by Zain and Wray states that the fast-growing Nigerian mobile phone business now accounts for about half of all the Kuwaiti group's African revevnues. In court, says Wray, "Masiyiwa's lawyers are arguing he should be allowed to buy back Zain's Nigerian business at the price set in 2006, in effect blasting a hole straight through Zain's plans to sell its whole African operation with Nigeria as the jewel in its crown."

Well, another episode of Zain (Africa) Speculation Watch has probably left you not much the wiser. It was ever thus. Let's see what happens in the next installment. Don't touch that dial etc.

Zain (Africa) Speculation Watch: Episode 12

A mixed week for telcos in the UK press

Non-British readers will probably only associate the city of Liverpool with the Beatles and the city's red-shirted, iconic football (translation for US readers: soccer) team. Apologies to the blue half of Liverpool for reminding you that your local rivals are much more famous. You knew that anyway. It wasn't a jibe - I can't very well make sarcastic remarks about the profile of football clubs given that I am a dyed-in-wool QPR supporter.

Liverpool sometime attracts attention for more controversial reasons. British readers may recall the colourful then-Member of Parliament (now London mayor) Boris Johnson raising the ire of Liverpudlians for making some pretty strong allegations about the character of the city's residents. In October 2004, Johnson wrote that people in Liverpool "cannot accept that they might have made any contribution to their misfortunes, but seek rather to blame someone else for it, thereby deepening their sense of shared tribal grievance about the rest of society". He said Liverpudlians "wallow" in their "victim status", adding that this is part of the "deeply unattractive psyche" of many in the city. I am sure this is untrue, and Boris did get quite a telling off from his boss. With these thoughts in mind, however, I did smile on seeing seeing the following:

"Phone giant BT charged a Huyton pensioner £100 for call out to replace two AA batteries", moaned a Liverpool Echo headline on Saturday. The accompanying article alleges that an elderly, cash-strapped and bed-bound BT customer was, without fair warning, charged £100 to have an engineer visit his home and pop a couple of new batteries into his phone. The article quotes a BT spokeswoman as saying that the customer had been advised the fault was in the phone, adding "we are satisfied from our customer service records the customer was properly advised about the possible charges ahead of the engineer's visit." If you can be bothered to watch the video clip below, you will notice the 'victim's' daughter admitting that she'd been advised to check the phone and expect a call out charge:

The Liverpool Echo doesn't let this get in the way of a good opportunity to stir local opinion about our national incumbent operator. This does make me wonder how much this paper might have contributed to the the city attracting the kind of criticism levelled by Boris Johnson.

I appreciate that a modern, competitive telco needs to be customer-centric, but I also feel that operators cannot very well cater to the whims of everyone with an unreasonable demand and a misplaced sense of injustice.

With this in mind, I was pleased to see our industry getting some praise in a UK newspaper this week. The Guardian ran a very upbeat article about how the mobile phone is helping to lift people in developing countries out of extreme poverty. It's a good read and filled with heart-warming anecdotes. This is my favourite:

"For much of his life, Mukeba didn't have an address. His corrugated iron house had no number and his volcanic ash street in the heart of Goma had no name. There was no postal service and the phone system had long since disintegrated. So when his mother died in 1995 on the other side of the Democratic Republic of Congo, her church sent a note marked only "Deograsias Mukeba, Goma". Remarkably it got to him - but three weeks after the funeral.

That was before. Now Mukeba's address goes with him everywhere. It has transformed the 33-year-old's life. It is an old Nokia mobile phone. "It was very hard discovering my mother had died and been buried and I didn't know anything about it for weeks," said Mukeba. "But that's how life was. If you lived in Goma, Kinshasa was another planet.

"I didn't really have any work. When the cell phones came I found the money and bought one because it was cool to have. It cost me $25 (£18). It's a lot.

"My brother lives in Kinshasa where he is a trader. He called me and asked me to start finding some things for him that you couldn't get in Kinshasa but you could find in Rwanda and Uganda, like some electrics and car parts. Now I speak to him every day. I send a lot of stuff. Now we are making money."

One customer in Western Europe whines about the telephone company. Another in the Democratic Republic of Congo cannot speak warmly enough about his mobile service. Our industry can frustrate and delight in equal measure. I guess it depends on your sense of perspective.

A mixed week for telcos in the UK press