‘Severely challenged’ Telkom cleans house

telkom 3 ‘Severely challenged’ Telkom cleans house

In a bid to sort out ‘legacy issues’, the group announces a write-off of R12m in defunct assets and settles its second case with the competition authorities

Telkom’s new leadership is dramatically cleaning its house of “legacy issues”.

Not only did the group this week announce the write-off of R12 billion in defunct assets, it also settled its second case with the competition authorities, making far-reaching commitments to level the playing field in South Africa’s telecommunications market.

Telkom has agreed to pay another R200 million in fines on top of the R449 million it was fined last year in a separate case before the competition tribunal.

The settlement was simultaneously announced by the competition commission in a statement and by Telkom’s new CEO, Sipho Maseko, at the company’s annual results presentation on Friday.

Maseko was appointed less than three months ago and is attempting to right what many analysts viewed as a sinking ship.

The “in principle” settlement relates to complaints made between 2005 and 2007 by the Internet Service Providers’ Association as well as MultiChoice subsidiary Internet Solutions.

The gist of the complaints is that Telkom abused its control of infrastructure to benefit its own retail internet offerings at the cost of competitors that also rely on Telkom infrastructure.

In the first competition commission case, Telkom was found guilty of anti-competitive practices after complaints, between 1999 and 2004, that it refused other Internet Service Providers (ISPs) access to essential infrastructure.

Initially, it appealed this decision to the Competition Appeal Court, but that appeal was recently dropped.

The negotiation of an additional R200 million fine for the second case appears to be a sensible move for Telkom, as sources familiar with the investigation have described as “stronger than the first case”.

Considering that Telkom’s profit was R501 million (excluding the write-offs) in the year to March, these are sizeable fines. However, they are all payable via instalments in terms of the agreement with the commission.

According to the competition commission, the settlement includes an admission of guilt, the financial penalty of R200 million, as well as a “functional separation” between Telkom’s retail and wholesale divisions.

This means that it has to ensure non-discrimination against other ISPs and also protect the confidential information of ISPs that use its services from abuse by Telkom’s own ISP retail segment.

The company will have to account for its retail operations separately to allow scrutiny.

Telkom will also have to ensure price reductions, mostly in its wholesale business selling access to infrastructure like ADSL lines and undersea cables to other ISPs, that will save customers altogether R875 million over five years.

Its prices need to fall in 2014, 2015 and 2016, and Telkom must “ensure” the reductions are not reversed in 2017 and 2018, says the commission.

Altogether 30% of the price reductions’ effect need to be felt in the retail segment by normal consumers.

Shan Ramburuth, the competition commissioner, said they “are satisfied with the settlement agreement and expect it will lead to a more open and competitive market, and translate to lower prices for consumers”.

Another talking point of the annual results was Telkom’s decision to impair the carrying value of its fixed-line network by R12 billion.

This move will reduce its net asset value from about R57 a share to R34 a share.

That is still far more than the price Telkom is trading at on the JSE: roughly R15.55 on Friday.

Maseko said that for the past five or six years Telkom’s share value was trading below the net asset value and this was a major driver behind the decision.

He admitted that some of the “legacy assets” were outdated and delivered returns “below commercial norms”.

Telkom was at pains to point out that the impairment charge is a non-cash item that does not affect its cash flow or ability to fund investments.

It nevertheless made the group’s loss in the year rocket to R11.5 billion as opposed to its loss of R78 million a year earlier.

“The decision to impair is another important step in this transformation journey,” said Maseko.

“It allows us to draw a clear line between our historic position and our future, enabling us to reset our base to become competitive and efficient.”

Maseko described Telkom as “severely challenged” but “not broken”.

“Our key shareholders are frustrated, our customers are frustrated and I can promise that we will not repeat the same mistakes of the past,” said Maseko.

He said senior executives were looking at how to restructure Telkom’s management so that there were less layers between the “top man and the customer”.

“Telkom is at a crossroads and perhaps has been stuck at this point for quite a while,” said Jacques Schindehütte, Telkom’s chief financial officer.

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