Last week, Telkom announced to shareholders it was making good progress in talks with KT Corp, Korea’s incumbent fixed-line operator. Though the offer price has been cut by nearly a third — unsurprising, given the dismal performance of Telkom’s share price since talks began seven months ago — analysts are upbeat about the deal.
The view is that KT Corp was in a similar position to Telkom 10-15 years ago: the Korean telecommunications market was being liberalised, competition was flourishing and the operator had to reinvent itself for a radically different technological and commercial environment. In the intervening years, KT Corp has played a pivotal role in helping transform Korea into one of the world’s most connected countries.
In SA, too, the competitive landscape has changed dramatically. Telkom’s monopoly is being systematically dismantled: new undersea cable systems mean international bandwidth prices are tumbling and private sector-led investment in long-distance and metropolitan fibre networks is pushing down national costs. The last real remnant of Telkom’s monopoly, the fixed local loop into homes and businesses, will come under attack from next-generation wireless technologies and, to a more limited extent, regulatory interventions such as local-loop unbundling.
That Telkom is under pressure is putting it mildly. The company is being forced to retreat from its costly investments elsewhere in Africa. At home it is facing a growing list of challenges, among them a deflationary pricing environment; powerful and smart competitors; a bloated, inflexible and unionised workforce; ongoing fixed-to-mobile substitution; and huge start-up costs as it belatedly tries to enter a mature mobile market with 8ta.
Then there are the monopoly abuse investigations related to its market behaviour in the past 10 years, and the likelihood of punitive fines, not to mention other regulatory interventions that could crimp its margins.
In many respects, Telkom is facing a perfect storm. Selling a portion of its business to the Koreans, then, appears to be a smart move. Not only will it be able to draw on the management expertise of one of the world’s leading telecom operators, it will also have access to more of the technical skills it needs to build the next-generation broadband networks that will keep its rivals at bay.
It looks good on paper, but we must remember this is not the first time Telkom has had a foreign partner. In the late 1990s government sold 30% of the fixed-line operator to Thintana, a consortium made up of America’s SBC Communications (now AT&T) and Telekom Malaysia. Thintana was awarded a management contract at Telkom which meant top foreign executives filled key roles at the company. With the benefit of hindsight, it’s clear their mandate was to extract maximum profits from Telkom by hiking the cost of telephony. Thintana helped Telkom to become a more efficient operator by introducing management best practices at the company, but the cost to SA’s economy was high as it sought to extract maximum monopoly rents.
Now, KT Corp’s investment plans include what Telkom calls a five-year “co-source management services” agreement. Little of what this contract will entail has been disclosed but given the Thintana experience, it would be wise for government to interrogate it.
Certainly, the SA telecoms market is very different to the one of 15 years ago when the Americans and Malaysians invested. Beyond the fixed local loop, Telkom has little left of its monopoly that can be abused. And KT Corp will probably be good for Telkom.
But the deal still deserves careful scrutiny.