Telkom has filed a court application to challenge the Independent Communications Authority of South Africa's (Icasa) decision to cancel the high voice-call fees mobile network operators pay to small rivals.
The company said in its half-year financial results statement that the regulator had concluded that only new entrants should qualify for asymmetric mobile termination rates (MTRs) and that the 20% total minutes terminated threshold to qualify for termination asymmetry be removed.
Telkom argues that the “conditions upon which asymmetry was conceived persist, that the findings are irrational and that they do not promote competition”. It has asked the court to set aside Icasa's determinations.
Mobile network operators pay a fee to carry each others calls. With asymmetric MTRs, Vodacom and MTN are paying more to their small rivals in an arrangement meant to prop up late entrants to the market.
Icasa is phasing out the 12-year-old MTR agreements. However, asymmetric MTRs will still be implemented for new entrants to the mobile voice market.
In an interview with Business Times, Telkom CEO Serame Taukobong said: “We still think the market is not balanced. We still feel that if you look at the two players [MTN and Vodacom], there is an opportunity to use asymmetry to ensure we increase competition, especially for the smaller players. We hold that the market has not [reached] a point where you can say there is equitable distribution of revenue to remove the [asymmetric] MTRs.”
These are three key businesses which any mobile operator looking to go into 5G and beyond will need. So I think the structural strength we have in Telkom still makes a strategic conversation with MTN possible
— Serame Taukobong, CEO, Telkom
MTN South Africa executive for corporate affairs Jacqui O’Sullivan said: “MTN is opposing the application as it does not believe the challenge is based on any robust evidence … that the South African mobile telephony market is uncompetitive.”
Cell C chief legal officer Zahir Williams said the company was reviewing the regulator's findings. “As a smaller operator we have a financial dependency on call asymmetry and have given input to the regulator on the negative impact of a withdrawal within the short timelines proposed.”
This week Telkom, which reported weak half-year financial results, said it has made progress in its programme to unlock value, which is aimed at finding partners or equity investors for some of its units. According to Taukobong, the board has given management the go-ahead to look at “a partial [or] even a complete disposal of our towers business [Swiftnet]”.
Swiftnet houses Telkom’s mast and tower infrastructure, and recorded a 2.1% decrease in revenue to R660m. The company was scheduled to list early this year, but this was cancelled due to market instability.
Taukobong said Telkom is “engaging with players who expressed interest ... we hope to unwind and certainly go to regulatory approval towards the end of the year. As you can imagine, it's something that's quite sensitive, but the conversations have started.”
Telkom subsidiary BCX, which marginally grew its revenue, has partnered with Alibaba Cloud, a subsidiary of the Chinese group of the same name, to provide a wide range of cloud computing products and services to the continent. The partnership is expected to start contributing to revenue in financial 2024.
Taukobong said the partnership will add more skills and products to BCX’s information and communications technology offerings. “Right now it is more of a revenue share-type model. We are continuing the path to seek a strategic equity partner for BCX.”
Telkom has legally separated Openserve into a standalone subsidiary, which Taukobong said “allows us to have engagements with potential suitors and partners who'd be interested in Openserve”.
Openserve has been at the centre of MTN’s attempt to buy Telkom, with analysts speculating that the country’s second-biggest network operator was more interested in the fibre business as a way of catching up with its rivals in that market. The two companies terminated discussions in September.
However, Taukobong and MTN Group CEO Ralph Mupita still see a compelling rationale for the tie-up.
The “strategic logic of that proposal still makes sense, but it needs to be run in a place where there is a similar approach and view on it”, Mupita said recently.
Taukobong said apart from its mobile business, Telkom’s data centres, ICT assets and fibre are attractive to would-be partners or investors.
“These are three key businesses which any mobile operator looking to go into 5G and beyond will need. So I think the structural strength we have in Telkom still makes a strategic conversation with MTN possible.”
All the South African telecoms companies have reported weaker profit growth from their local operations over the past six months, driven by a combination of rising network costs, employee cost pressure and much weaker prepaid revenue trends
— Peter Takaendesa, head of equities, Mergence Investment Managers
Asked if the companies were likely to resume talks, Taukobong said: “We have ongoing engagements with MTN. They are, for instance, our second-biggest customer with Openserve. We have signed a roaming agreement with them, so we are always in talks.”
In an interview last week, after Vodacom’s half-year results presentation, its CEO, Shameel Joosub, weighed in on the failed takeover talks. He said the transaction was potentially complicated and one of the biggest regulatory hurdles would be spectrum because the combined business would have more than double the spectrum than any of its rivals. “That would have created complexities in front of the authorities.”
He said if MTN had only targeted Openserve, “it would have found the opportunity easier”.
In an Icasa-approved deal, Vodacom merged its fibre business with that of Vumatel and Dark Fibre Africa (DFA).
Telkom’s revenue declined marginally by 0.7% to R21.1bn. Profit after tax plunged 52.9% to R641m, which it attributed mainly to higher handset costs and operational expenses. The company pays upfront for high-end devices offered to consumers, but takes a while to recover the money due to the length of contract periods.
Its mobile business recorded a 10.9% rise in subscribers to 18-million.
Telkom said it expects revenue and growth in earnings before interest, tax, depreciation and amortisation to be in the low-to-mid single digits in the medium term.
Peter Takaendesa, head of equities at Mergence Investment Managers, said operational performance is likely to remain challenging for the rest of the year given cost pressures and the potential for further strain on consumer spending.
“All the South African telecom companies have reported weaker profit growth from their local operations over the past six months, driven by a combination of rising network costs, employee cost pressure and much weaker prepaid revenue trends. Effectively a toxic cocktail of growing cost pressure, while weakening consumer spend weighs on revenue growth.”
He said Telkom’s downwardly revised midterm growth guidance is not far off guidance from peers, “but we believe it will be challenging to achieve without major cost rebasing measures, given we are likely to be in a constrained consumer spend environment as rising interest rates and inflation are likely to present a major headwind”.
Takaendesa said Telkom “really needs to prioritise its value-unlock strategy so it can release capital to reduce debt on its balance sheet and fund growth in fibre and mobile”.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.