State will be out of the telecoms industry if the MTN, Telkom transaction succeeds

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If MTN’s acquisition of Telkom is successful then the government will effectively not have a presence in the telecommunications industry. 

Last week, both companies said discussions about acquiring the entire issued share capital of Telkom in return for shares or a combination of cash and shares had started.  

Telkom is 50.7% owned by the government, 39.8% is through direct government shareholding and 10.9% through the Public Investment Corporation (PIC). 

“I don’t think that’s relevant anymore,” said to Peter Takaendesa, the head of equities at Mergence Investment Managers, commenting on the government’s potential exodus from the telecommunications industry. Globally there are not many governments that own telecoms. That was an old functionality that is largely gone.” 

British Telecommunications, for example, was fully privatised in 1993 when the government sold off its shares remaining from the first sale of 50.2% in 1984.  

Takaendesa said the reason governments don’t play a big role in telecoms is they have increased their regulatory capacity.  “Instead of owning you can just regulate.” 

The Independent Communications Authority of South Africa (Icasa) was established in July 2000 and Telkom was created in 1991. 

“It was important back then that they owned telcos because in most cases there was just one operator in the country and there was a monopoly. So, if the government does not own a monopoly, a monopoly is going to charge the consumer to the end of the world,” he said. 

He noted that because the telecommunication industry has multiple players such as Vodacom, MTN, Cell C and Rain, there is enough competition to drive prices down and the government does not need to insert itself to ensure such anymore. 

Simon Brown, an independent equity analyst, said it is not important for the state to have a stake in the telecommunications sector. “They have effectively been a minority shareholder since they stopped fiddling and the sector does perfectly well without them.” 

Telkom has about 14% of South Africa’s cell phone customers; Vodacom dominates with 42.5% and MTN has 30% of the market, as the Mail & Guardian previously reported.  

Brown did say that one issue with a privatised telecommunications sector was the effect on the poor. “On mobile that is not an issue due to competition, but maybe more so in fixed line and internet. But the former is dead and the latter is accessed via mobile data.”

The Competition Commission investigated the high data prices in South Africa in 2017. The report, which was presented two years later, found that the data services market is “highly concentrated” with a duopoly of the leading cell phone operators — MTN and Vodacom. 

Takaendesa said the privatisation argument is not relevant because Telkom is “not like other state-owned entities” because it is already largely privatised. 

The government first sold a stake in Telkom in 1997, when it sold 30% to Thintana Communications, a company registered in the United States. The proceeds were invested in Telkom to modernise it.

Makwe Masilela, an economist and chief investment officer at Makwe Fund Managers, said: “There is nothing that a government’s presence is going to add in Telkom. For Telkom to even survive in the past few years they’ve had to reduce their headcount significantly.” 

Over the years, Telkom has cut its staff numbers through several voluntary retrenchment cycles as it tried to cut back on costs. 

Takaendesa said: “If the government really wanted to control telecoms in South Africa, they would have to own Vodacom or MTN [with a big] shareholding. Telkom has continued to be smaller and smaller; it’s not going to be of any use really. Privatisation is not a strong argument for now.” 

But Masilela believes it is important for the government to have a stake in the country’s telecommunications industry, “in fact, in all the important sectors”.

“We don’t want to end up with a situation like Iscor. The government needs to use shares as security because if we are not careful we will end up selling everything and saying we don’t have money,” he said. 

Iscor was a state-owned steel company that was privatised in 1989 and became the Mittal Steel Company and later ArcelorMittal South Africa. 

Masilela said he could not see MTN putting up about R25-billion outright to buy Telkom. “It will be a combination of cash and shares. So, this means the government will have shares in MTN. I don’t think it would be very wise for them to accept all the money from the transaction that they get because going forward MTN will grow nicely and have a bigger market share.

“So, whoever will advise the government to take cash will be very short-sighted because, if they take the money and bail out state enterprises, that money will not generate anything going forward.”

Anathi Madubela is an Adamela Trust business reporter at the M&G.