Telkom will win the battles it picks

Even as it prepares to report interims with Vodacom’s billions included for the last time, the fixed-line group will surprise us all as a leaner entity in future.

Most will tell you, if you give them the chance, that Telkom (JSE:TKG) is a dying company. They'll tell you that it has an antiquated network, it's a monopoly that's time has come and they'll moan about its service/strategy/people/management (insert suitable noun here).

Telkom is not going to win the battles it picks because it's a monopoly. In fact, the truth is that there are not many markets where it is still a monopoly.

Take phone services, as an example. For all the hype surrounding Neotel's consumer launch earlier this year, the country's first "converged operator" has only managed to sign up a few thousand subscribers. The options are there. The company's monopoly status has ended and rulings like the favourable ruling for Altech mean that consumers can't shout "monopoly" at the drop of a hat any longer.

Telkom is going to win the battles it's picked precisely because, for the first time ever, it's actually defined its objectives.

Sure, hearing CEO Reuben September talk about "realising Telkom's vision", "executing on its strategy" and its "three pronged approach" may sound like the same old thing over and over.

But the reality is that Telkom's management knows what it wants to do, and how it's going to achieve that.

Telkom's vision is to "evolve from South Africa's leading fixed-line business to the leading ICT player in Africa".

The execution of this strategy is apparent in a number of small and not so small moves the company has made of late. Among the first, leading businessman Mark Lamberti joined the board as a non-executive director, clearly made the contribution he needed to, and after that was done, he stepped down.

Telkom has also long-trumpeted its aim of following a "three-pronged approach" (another of September's catchphrases). These centre on expanding in the fixed-mobile space, growing converged and managed data services and pushing ahead with geographic expansion.

In the past 18 months, it's made substantial advances on each of these prongs.

Locally, it says it will "selectively capitalise on mobile opportunities". While it says it will stop short of building a fourth mobile network in the country, one can be sure that this won't be a spotty network only available in some parts of the country. The group will spend about R2bn to build its fixed-wireless network in South Africa.

The value for consumers lies in being able to move around with, what's essentially, your home phone. This is real and Telkom, despite what it says publicly, is testing the network. It's a cellphone and home phone, rolled into one. One can assume that Telkom has signed a roaming deal (even if it's only a temporary one) with one of the major cellphone networks. Whether there's enough trust left between Vodacom and Telkom remains to be seen. Alternatively, Telkom may have found a willing partner in its previous suitor, MTN (JSE:MTN).

There's one major stumbling block preventing Telkom from launching this now: the fact that its complicated Vodacom shareholders' agreement with Vodafone prohibits it from entering the mobile space. By the middle of next year, with the unbundling of its Vodacom stake complete, this service will be a reality.

In the data space, Telkom has launched a 3G network with very aggressive pricing on the out-of-bundle rates. The network is generally faster than what's currently available from mobile operators MTN and Vodacom. On the Telkom Business side, it inked a mega deal with Absa for a wide area network valued at R1,7bn.

The group has made it clear it will spend to build its presence in Africa, too. It acquired (and overpaid for) Africa Online, an ISP business. It made a sizeable acquisition in Nigeria (75% of Multi-Links for $280m) and is pushing aggressively to grow this; Telkom's portion of the network expansion amounts to around R4bn.

Just this week it announced the acquisition of MWEB Africa. For those used to Telkom's normal deal-making "skills" (think the protracted MTN negotiations, a year's worth of toing and froing over Vodacom), this move is rather ingenious.

Telkom paid $63m for MWEB Africa, plus a 75% stake in MWeb Namibia. MWEB Africa is based in Mauritius and has a presence in Nigeria, Kenya, Tanzania, Botswana, Uganda and Zimbabwe. The deal means adding bulk to its existing ISP business on the continent, Africa Online. It also adds to its suite of services its offering through Multi-Links in Nigeria.

ICT players in developed markets need to buy growth, and Africa is one market offering some interesting opportunities. The tendency is to overpay a little for assets (as is evident in some of the purchases by Middle East-based mobile operator Zain, as well as Vodacom's Gateway Commnuications buy). Some commentators say that $63m is at the "upper end" of what Naspers (JSE:NPN) expected to fetch for those assets. Right now, it's rather opaque as to what Telkom's actually buying.

Telkom is making surprising progress, but there are some battles it's chosen not to fight (or at least right now).

The much-vaunted "outsourcing" of its staff locally has been put on the backburner. Telkom Media has been up for sale for almost a year now, and solving this problem is key in getting rid of distractions (and stemming the drain on cash that business had become). High charges on the SAT-3 cable which Telkom co-owns will plummet, because that's what competition (from the likes of SEACOM and EASSy) does to prices.

A year from now we'll be looking at yet another incarnation of Telkom as we know (knew) it. It will be leaner, it won't have near a R100bn market cap, but it will be executing on the strategy its management have communicated to the market. Makes a change, doesn't it?

* Hilton Tarrant contributes weekly to "Broadband" a column on Moneyweb covering the ICT sector in South Africa. He is impressed at how far Telkom has come from where it was 24 months ago, and may just look to get a piece of the unbundling action...

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