Telkom South Africa Quiet On TelOne Acquisition

Mergers, Acquisitions and Financial Results

Telkom is giving nothing away in response to rumours that it is negotiating to buy 60% of Zimbabwe's state-owned telephone operator, TelOne.

Speculation has been circulating in Zimbabwe for several weeks and the Zimbabwe Independent said Information Communication Technology Minister Nelson Chamisa had confirmed that Telkom was talking to TelOne. Chamisa did not say how much shareholding Telkom was looking for, but sources say it is chasing a 60% controlling interest.

The only comment from Telkom's corporate development executive, Mike Mlengana, was: "Telkom continues to explore and investigate acquisition opportunities in Africa. This process is informed by strict financial criteria to ensure shareholder value creation."

Those criteria may well sink a potential deal, since taking control of TelOne would force Telkom to address its debts and invest millions of dollars in expanding the decrepit networks owned by the loss-making company. TelOne has already said it would use some of the cash received through its partial privatisation process to revamp equipment that was vandalised or dilapidated.

Yet Telkom is already pumping much money into a loss-making subsidiary in Nigeria, which it bought with great enthusiasm only to be forced to impair R2,1bn last month. The Nigerian business, Multi- Links, is soaking up large amounts of management time as well as cash, so Telkom's board may not feel it is prudent to buy another operator that is clearly in need of costly renovation.

Although CEO Reuben September cites expansion into Africa as a key strategy, the damage Multi-Links has inflicted on its balance sheet may sway Telkom to seek less challenging acquisitions.

The Zimbabwe Independent said it understood that Telkom had already conducted due diligence on TelOne, which does not have the money to fund network improvements. TelOne was in dire need of capital to upgrade and expand its aged network, the newspaper said. However, raising capital had been tough given the political and economic environment and legislation limiting foreign ownership of Zimbabwean companies to 49%.

TelOne has begun restricting calls from landlines to cellphone numbers to reduce its debt , after racking up more than 22m of debt to cellphone operators through unpaid interconnection fees. When one of TelOne's 300000 customers calls a cellphone number, TelOne pays that operator 0.07 a minute. Since TelOne's network has not expanded while the cellphone operators' have, the amount it pays in interconnection fees is forever rising.

TelOne MD Hampton Mhlanga has also complained that a cabinet decision to force the company to slash its tariffs this year had plunged the company deeper into debt.

Business Day