Hedberg or iceberg?

Famed turnaround specialist Jeffrey Hedberg has taken over the helm as acting CEO of the slow sinking Telkom ship. While plans are afoot to patch leaks and mend sails, doubts remain as to whether the fixed-line operator is moving in the right direction.

WHILE HEDBERG has already plotted a recovery course, industry insiders argue that the damage done by the company`s Nigerian operation, Multi-Links, and a planned ambitious move into the mobile industry may see the captain go down with his ship.

Telkom has been in a slump after reporting just more than flat revenue growth at its last financial results, a situation that was further compounded by an exodus of top talent, including CEO Reuben September and CFO Peter Nelson.

Maintaining a semblance of order, the company hastily installed Hedberg to manage the crisis. Quick to rise to the challenge, Hedberg has already outlined a five-point turnaround strategy to save Telkom, but the strategy is not without criticism.

RECOVERY COURSE

Hedberg`s strategy includes a focus on leadership and organisation, specifically on the rejuvenation of company culture. "Telkom will no longer be defined by a set of individuals," he said.

Ebitda (earnings before interest, taxes, depreciation and amortisation) and cash flow improvement is the second key point of Hedberg`s strategy. "These cannot be measured immediately, however, the team is working very hard and showing good promise."

The imminent launch of Telkom Mobile is Hedberg`s third priority. He noted that he sees great potential in getting the operation off the ground and offering bundled fixed and mobile offerings.

The fourth point of Hedberg`s strategy is his emphasis on the operator`s broadband offering. He noted that Telkom`s broadband offerings will be one of the company`s key differentiators going forward - not only with ADSL, but also in future mobile broadband offerings.

He also acknowledged the strategy would focus on the repositioning of Multi-Links as the fifth point.

The acting CEO has made it clear that his strategy goes beyond the short term, a statement which comes amid concerns that his tenure as acting CEO would be short-lived without reaching the potential of his expertise.

However, Hedberg explained that, if Telkom was simply to focus on the short term, only to drive the next quarter, the company might miss opportunities down the road.

"It`s about trying to find a balance about what we need to do to improve the operational and financial situation of the company, while - at the same time - not being too short-sighted about how we are investing and allocating those resources."

One month into the turnaround plan and Hedberg insists things are on track, but industry insiders argue that the challenges facing the acting CEO regarding Multi-Links and Telkom Mobile mean Hedberg may be stuck on a leaky ship in rough seas.

MULTI-LINKS SOS

Telkom initially invested in Nigeria in 2007, but the unit has been a disappointment since it joined the Telkom stable. So far, Telkom has written down Multi-Links by R5.6 billion, which is a third more than the company paid for the Nigerian operator.

The company then acquired the remaining 25% shareholding in Multi-Links in January last year, for $130 million (about R1.224 billion), after buying 75% of the company in May 2007 for $280 million (about R1.96 billion).

"Multi-Links was supposed to be a breath of life for Telkom, but it is increasingly becoming a liability," says Frost and Sullivan ICT industry analyst Spiwe Chireka.

Telkom has a lot riding on a successful operation in Nigeria, since it has pitted Multi-Links as one of its financial fillers for the loss of its Vodacom revenue.

However, Hedberg explains that the challenge facing Multi-Links lies in the fact that the company operates CDMA technology in a market that is dominated by 90% GSM technology. Multi-Links, therefore, has a 2.6% market share in Nigeria.

Nonetheless, he remains confident, having being involved in the Nigeria operation and now as head of the Telkom group, that he has the necessary insight to rescue the situation.

"We are looking at how we can reposition the business in Nigeria. Although Multi-Links doesn`t just have a licence for wireless, it does have a licence for fixed and data as well. Telkom also has 7 000km of fibre in the ground in Nigeria and now we want to position ourselves in that area.

"We have an advantage there, because Telkom is good at servicing the business customer and, because of the scale and growth of Nigeria, we have a lot of companies looking for this type of service."

Denis Smit, MD of BMI-TechKnowledge, remains unconvinced by the strategy. "I have serious concerns about the Multi-Links strategy, but one can have sympathy with their plans to `claw back` some of the investment first."

Hedberg has previously stated that the company may consider selling the operation if the repositioning strategy fails. However, Chris Gilmour, Absa investment analyst, argues that it is unlikely that Telkom will find a buyer for Multi-Links in its entirety, as it has been a loss-making entity since Telkom bought into it.

Analysts are of the view that it is "do or die" time for the Nigerian operation, which - if successfully repositioned - will be in a position to ride the wave of the Internet in Africa.

In the meantime, the company remains focused on unveiling Telkom Mobile before the end of the year.

MOBILE LIFEBOAT

As fixed-line voice revenue dwindles, Hedberg has prioritised the unveiling of Telkom Mobile, which is expected to cost the company in excess of R6 billion rand in infrastructure development over five years.

The company`s five-year investment figure may not reach as high as R6 billion, since Telkom says it is negotiating special financing structures with suppliers that could bring the costs down. The company has been in the spotlight recently as it takes on the mobile industry with calls for an asymmetrical interconnect rate.

The Independent Communications Authority of SA has since stepped in on the matter and is due to hear the case at the end of September.

Smit remains undecided as to whether the company`s mobile play will do much to up the company`s profit margins, as this will likely be impacted by what ICASA decides regarding the mobile termination rates.

Chireka concurs, and adds that Telkom is entering an already saturated mobile market. While she is confident the mobile play will add to the company`s bottom line, she predicts it will take longer than expected to be a significant contributor.

She advises that Telkom should not seek to become the next top operator in an already saturated market, but instead focus on generating healthy margins to support or complement its fixed-line offering.

Hedberg`s strategy seems to be in line with this advice, as he said Telkom`s move into the mobile market will be based on bundling both fixed-line and mobile services, which may help the company gain some market share.

He pointed to the company`s focus on the rollout of its new 10Mbps broadband offering.

"While these two offerings are currently moving in parallel, we will have to look at bundling the two to be able to go to the home user, for example, and say here is a laptop; here is a dongle to go into your laptop; and here is ADSL if you don`t need to be mobile.

"Our advantage would be in the bundling, because - as you see - the trend in the market is that wireless companies are moving into fixed-line and vice versa. We have an advantage, because we have the infrastructure in place already," he added.

Nonetheless, some industry observers are less than confident of Telkom Mobile`s possible success and argue that Telkom can look forward to an uphill battle.

Independent telecommunications analyst Richard Hurst argues that Telkom is coming in at a disadvantaged position. He points out that Cell C, which launched after Vodacom and MTN, has had to battle to gain market share.

Telkom will have to be more agile and innovative, he offers. "Coming in as the fourth player, it`s really going to be difficult for them."

Hurst is sceptical that Telkom can offer a bundled product that can lure current cellphone users onto its network. "Even if Telkom bundles, there are a limited number of landlines. In the mobile game, you need millions of subscribers."

Telkom will have to be extremely innovative, maintains Hurst. Even then, he does not see Telkom Mobile reaching the same size as MTN and Vodacom.