The interest of Mvelaphanda Group in South African telecom firm Telkom SA Ltd looks opportunistic. Telkom has caught the eye of a consortium led by the investment group of black politician-turned-entrepreneur Tokyo Sexwale. Mvelaphanda is Telkom’s third potential suitor in less than a year. This time it’s a financial rather than trade buyer.
At first glance, the interest might seem odd. Previous interested parties, local operators MTN Group Ltd and Cell C, would have found synergies from combining Telkom’s declining fixed line business with their existing operations. Mvelaphanda has no assets to combine, and its interest is conditional on Telkom’s willingness to sell its star asset: 50% of Vodacom, South Africa’s second largest mobile operator.
The appeal is in the price. Even after the 10% surge of shares on Monday, Telkom looks undervalued. Assuming its share of unlisted Vodacom is worth $10 billion (Rs42,500 crore)—the its price partner, UK-based Vodafone Group Plc., was reportedly willing to pay for it last year—investors are attributing almost no market value to its remaining business.
Fixed may be under pressure, but it’s profitable. Even before Mvelaphanda’s interest was disclosed, analysts gave Telkom a sum-of-the-parts value of around $11.5 billion.
A takeover and break-up of Telkom could be what shareholders need. Vodacom’s joint venture structure has made it hard for Telkom to offer combined fixed and wireless services. Also, Vodacom may be missing key opportunities in mobile, thanks to the difficult working relationship between its co-owners. If merger talks between MTN, South Africa’s largest mobile operator, and India’s Reliance Communications Ltd are successful, Vodacom could face more potent competition across Africa.
Politics have tripped up previous efforts to sell Telkom, which is 40% owned by the South African government. A company break-up would make sense, but Telkom has been keen to not get stuck with the rump fixed-line assets. Sexwale, who was a prisoner with Nelson Mandela, could be an acceptable owner. Vodafone, which has first right of refusal on Vodacom, would be the biggest winner.