Telkom loses grip on Africa

Telkom loses grip on Africa

With over 100 years of experience, investment and government backing, it is expected that Telkom would be leading the ascent into Africa, being the first to mount its flag for success.

Instead, the telco is barely clinging on as poor leadership, inconsistent strategy and costly business decisions have placed it at the precipice of a free fall into insignificance.

Upon listing in 2002, the company noted that its growth into Africa would account for 40% of group revenue; nearly a decade down the line, the company has not ever come close to that target.

Now, Telkom will put that strategy on hold, but in so doing it may risk any significant future in Africa.

AT WHAT COST?

Telkom recently pulled the plug on its money-haemorrhaging Nigerian CDMA business, Multi-Links, but only after suffering losses of billions of rands.

The telco bought 75% of the company in May 2007, for R1.96 billion. In January last year, it bought out the balance of Multi-Links, investing a further R1.224 billion in the company. The fixed-line operator has written the unit down by more than R5.6 billion since entering the West African country.

Feeling the burn, acting group CEO Jeffrey Hedberg finally conceded that it would be in the company`s best interest to stabilise its local operation before embarking on any new opportunities across the continent.

This decision is justified when considering the company`s poor performance locally. Telkom`s interim results saw revenue down 5.4%, to R17.6 billion, EBITDA down 0.6%, to R5.1 billion, and profit from continuing operations down 9.3%, to R1.4 billion.

Telkom expects shedding Multi-Links` CDMA business to cost it between $100 million (R690 million) and $180 million (R1.25 billion), excluding any benefit from the sale.

Despite a clear necessity for the drastic move, independent communications analyst Richard Hurst has slammed the telco`s failure, saying it is indicative of a company with no real African strategy to begin with, as well as no technological roadmap post acquisition or even a clearly defined exit strategy now.

"It seems Telkom`s African strategy was more of a land grab than a well thought out business strategy. The company said at the time that its Nigerian acquisition would be its springboard into Africa, but that has failed."

Hurst explains that any company hoping to move into the African business environment must be prepared to undertake a long-term strategy. He points out that Telkom bought into Multi-Links just three years ago and is now already pulling out.

He argues that Telkom`s strategy is inconsistent, and points to poor leadership as a key component of this inconsistency. Worse still is that the leadership responsible for the Nigerian situation won`t be held accountable for the failure, since they have moved on from the company before the writing on the wall became too glaring.

Hurst maintains that Telkom`s early retreat from Africa will cost it dearly. He argues that when the company tries to re-enter the region, the cost will be significantly higher. Add to those costs the hit the company will take as it divests from Multi-Links and the figures become astronomical.

Nonetheless, Hedberg believes that, in two years` time, the telco will be better placed to make another significant investment on the continent. He believes that opportunities will still exist at a later stage, as will the telco`s potential to harness said opportunities.

"We are not ignoring Africa, but we need to get the local business stable and we need more maturity on how we as a business manage these assets. After repositioning our existing assets, we will look at investment opportunities in Africa again," he said.

However, it is questionable whether Telkom will ever again be in a position to make large inroads into Africa. Any major investment opportunities have been snapped up by younger and more agile competitors, such as MTN, which has established itself as a dominant player in Africa.

STIFF COMPETITION

However, MTN, which has a presence in several African countries, has conceded that heady growth days in Africa are drawing to an end.

MTN has recently seen several failed bids. Its on-again off-again marriage with Bharti Airtel finally collapsed towards the end of last year, when talks were abandoned because of government interference in the R184 billion deal.

Subsequent talks with India-based Reliance Communications Group regarding a "potential business combination" came to nothing. More recently, a R24 billion merger opportunity with Egyptian telecoms operator Orascom failed.

Recognising that the window of opportunity is fast closing, MTN hopes to benefit from cherry-picking several operations in the fragmented African market and consolidating these into one company.

Bharti Airtel has a large presence in Africa, after buying Zain`s African operations in 15 African countries. Tigo is a large competitor in Chad, the Democratic Republic of Congo, Ghana, Mauritius, Senegal, Sierra Leone and Tanzania.

France Telecom`s Orange brand is also present in Africa and has operations in several countries, including Botswana, Uganda, Kenya, Cameroon and the Central African Republic.

ROCKY TERRITORY

Although opportunities for new business in Africa are dwindling, analysts point out that the landscape is unstable at present, and Telkom`s decision to hold off on new investment for a while might be best right now.

"The African telco environment is undergoing sea-change as the effects of massively increased international bandwidth, roll-out of terrestrial fibre, mobile connectivity and data-based services come to the fore and impact local consumption and demand patterns," explains Mark Walker, director of vertical industries and insights for the MEA region at IDC.

"This is further compounded by increased international focus on Africa as an attractive investment destination, given the slowdown in developed economies in recent times - inflows into Africa are expanding regional economies rapidly, but in a risky manner," he notes.

"Many entrepreneurial experiments will be undertaken over the next 18 months in Africa in terms of data and mobile-based services by many telcos, yet only a small fraction will prove viable while many will be black holes absorbing cash with limited or minimal return."

Walker says Telkom is wisely adopting a longer term strategic view that focuses on its most lucrative market and fixing shortcomings locally, while effectively sitting out this round of African investment in anticipation of a maturing/shakeout in the African marketplace.

"Once the African marketplace has settled in 12-18 months from now, Telkom will hopefully have gotten its house in order and be in a financial position to take a stake, or add to existing investments in a proven yet fast-growing African company, and use this to make headway, while also ensuring a healthy ROI and minimising their risk," comments Walker.

SMALL STEPS

This means Telkom may be better placed for African business in the future, but the company may have to keep its expectations for the success to which it has become accustomed, low.

Telkom will keep its foot in the door in the region. Hedberg has committed to consolidating the telco`s existing African assets, including Multi-Links` data and fibre business and iWayAfrica.

He is confident of the success of Multi-Links` data and long-distance fibre network offering, arguing that the vertical industries in Nigeria provide a strong business case for the asset. Especially since no incumbent operator currently exists in Nigeria.

BMI-TechKnowledge research director Brian Neilson says: "Telkom has also elected to remain in the corporate market with its long-distance fibre connectivity in Nigeria, which indicates that they are not pulling out completely, but rather focusing on profitable, cash generating operations.

"There is still a window of opportunity to exploit in plugging the gaps that exist in many African countries to build and operate long-distance fibre networks, traffic on which is climbing extremely rapidly."

Hedberg also pointed out that Telkom would reposition iWayAfrica to focus enterprise customers across 32 countries throughout Africa.

Frost and Sullivan research analyst Protea Hirschel believes Telkom`s focus on its local strategy, and more specifically its converged fixed-line and mobile offerings focus, may be a key differentiator for the company`s future in Africa.

She explains that the converged telecommunications market in Africa is still in its early days. If Telkom perfects that locally, it may have a compelling offering for African markets at a later stage.

However, Hurst argues that other telecoms incumbents across the continent will also be concentrating on their convergence offerings, and will likely be ahead of the curve in two years time.

Nonetheless, all the analysts agree that Telkom cannot ignore Africa. Hirschel describes the telecoms landscape in the region to be the "holy grail" of the industry. The clear message is that Telkom`s strategy is as good as it can be considering the colossal Multi-Links failure.

Despite the strategy, success for Telkom will be limited. Inevitably the harsh realities of operating as a commercial entity - without government protection - will set in, and Telkom will finally realise that its actions have costly and far-reaching consequences.