Analyst looks at Telkom, BCX and SA’s ICT sector

Telecommunications company Telkom has made two attempts to buy IT infrastructure firm Business Connexion (BCX) with a R2.7bn offer, but it seems that things have ‘gone quiet’ following the passing of BCX’s CEO, Benjamin Mophatlane. To get an understanding of what can be expected to happen with the deal, and what is going on in South Africa’s telecommunications industry, Richard Hurst, Senior analyst at Ovum joined CNBC Africa’s Power Lunch to explain the details of the situation. International developments in the industry are moving along at a furious pace, and it is vital to South Africa’s competitive advantage that we hurry along after the curve, we’re not there yet, but it does seem that Telkom’s current management team and its acquisition of BCX is its best shot at progress in many years. – LF 

ALEC HOGG:  A circular was issued to all shareholders today and Richard Hurst, Senior Analyst at Ovum joins us for more.  I was looking at Ovum.  It’s an interesting company – an ICT research house, based in London.

RICHARD HURST:  Yes, indeed.

ALEC HOGG:  Do you have a big team here in South Africa?

RICHARD HURST:  In our local team, there are two analysts

ALEC HOGG:  So what you say goes back into the global environment and no doubt, has an influence on all these foreigners who want to invest in this country, or not.

RICHARD HURST:  There is definitely that element of it, but it’s more as if we’re the satellite of a larger mother ship, if you will.

ALEC HOGG:  What about Telkom, just before we go into this deal itself?  It’s had an enormous improvement in the share price in the last few months.  Has it been justified?

RICHARD HURST:  I think it is.  I think if we look at the management that had taken control of Telkom; they know their story.  They have a clear vision and a strategy of what they want to do with this telecoms company.  Previously, it was a bit of a misguided ship.

ALEC HOGG:  The problem now, of course: are they going to get these retrenchments through?

RICHARD HURST:  That’s going to be a bit of a sticky point for them and I think, due to the shareholding of that entity, it’s not going to be as easy as all that, because of the government shareholding.

ALEC HOGG:  And the deal with BCX: we do know that some years ago, they tried it.  Is it still going to happen?

RICHARD HURST:  It’s going to be a very…  It’s almost like déjà vu all over again.  They key here is that it’s a different market condition for both Telkom and for BCX.  Of course, if we remember the first attempt; that was killed by the Competition Commission.  It’s almost at the same time we have Vodacom bidding for Neotel, so it’s almost like a ‘me, too’, but the competitive environment is becoming increasingly more competitive in the telecoms sector.  They need to up their game and get into more value-added services.  That’s where the beauty of BCX lies, for Telkom.

ALEC HOGG:  A good fit.

RICHARD HURST:  It should be a good fit and seven years ago, it was still a good fit, so it should be, for all intents and purposes.

ALEC HOGG:  A little earlier today, Travis Robson was here from IG.  He’s a shareholder in BCX.  He said he was very concerned that things had gone quiet, and that the share price had kind of fallen back, suggesting that maybe the deal wasn’t going to go forward.

RICHARD HURST:  I think everyone was just biding their time and of course, with the passing of the CEO, I think talks might have been derailed slightly but I don’t think it was a major issue.

ALEC HOGG:  So it’s still a good business and it’s still a really good fit.

RICHARD HURST:  Yes, and I think ‘going quiet’ was just them, getting their ducks in a row because there are going to be all kinds of hurdles that they need to cross or get over, of course.

ALEC HOGG:  Do you like the Telkom management?

RICHARD HURST:  I’m going to say yes.  Of all the management that we’ve seen in the past years, these guys are the best of the bunch.

ALEC HOGG:  They call it the dream team.  They certainly have gone out there and plucked the best possible, available talent – South African talent, primarily.  However, we need to see it in the results now because certainly, the share price has performed terribly well.

RICHARD HURST:  That’s right, and I think the key is that we want to see growth.  They’re in a very difficult market of fixed-line services, coming late in the mobile play, so they really need to show the results, as you say.

ALEC HOGG:  Fixed line: how valuable is the fixed-line infrastructure that Telkom has?

RICHARD HURST:  Again, Telkom’s fixed-line infrastructure is the best of all the players in the market – if you compare Neotel etcetera – they have fibre, so they should be in an ideal position to deliver all these so-called funky broadband services etcetera.  The challenge in the fixed-line environment is that it’s a declining market.  It’s declining across the globe.  It’s slowly…one percent/two percent, and it’s really a challenge to turn this around.  The answer is of course, mobile, but Telkom is slightly late in the mobile game.

ALEC HOGG:  A bit like the newspaper business, I guess.

RICHARD HURST:  Yes, that’s one analogy.

ALEC HOGG:  One can’t really see too much upside in the fixed-line side, but they have the infrastructure and that infrastructure can be applied to different things.

RICHARD HURST:  Yes.  There’s the back hall…it’s a bit like having the roads.  People will be using your roads for all these new broadband services – high data services.

ALEC HOGG:  Why haven’t we seen more of that?  For instance, there’s always on/off speculation that Telkom are going to do a deal with Netflix and pump it through their copper cables or even their fibre, but nothing seems to come of it.

RICHARD HURST:  I think the problem is that fixed-line broadband is a very limited market, i.e. in this country, it’s for the LSM7 and LSM8’s and it’s not really being pushed or driven through to the lower income brackets.  I think there we would really need government assistance, just to enable that market.  By that, I mean creating a regulatory environment, which would increase competition and force down prices etcetera.

ALEC HOGG:  And government hasn’t been interested yet.

RICHARD HURST:  Government says things, but don’t do things and it’s almost as if they look at telecoms and it’s just supposed to be a money-maker.  There isn’t any real notion of how this can enable the economy of South Africa to compete and participate in the global ecommerce of the world.

ALEC HOGG:  Richard, with a group like Ovum, you would have looked at telecoms all over the world.  I remember reading research that said the incumbent – i.e. the telecoms of each market -, have a huge market because they were there to begin with but in South Africa, it seems almost as though that advantage has been thrown away.

RICHARD HURST:  it’s a bit of a double-edged sword because that advantage can also be whittled down very quickly.  You can see the likes in U.K.B.T. – it’s a good company, but they’re very similar to our own Telkom.  They’re fighting a losing battle – also facing declining fixed-line market trends.  The larger Vodafone players are giving them a good run for their money, so it’s a bit of a double-edged sword.  They tend to be the larger ships, which cannot turn as nimbly as the other mobile network players who have new technologies etcetera.

ALEC HOGG:  So the big issues to watch out for, on this one, are if this deal goes through with BCX, which it does appear it will and what happens with these proposed retrenchments to make it more efficient.

RICHARD HURST:  In addition, what will the concessions be that the Competition Commission will throw at Telkom?

ALEC HOGG:  Concessions on the BCX deal.

RICHARD HURST:   Yes, you’ll probably see something on wholesale, forcing more competition into the market.

ALEC HOGG:  It’s very interesting.  Richard Hurst is from Ovum.  Thanks for coming through to the studio today.  Ovum is one of the multinationals that focuses on the TMT sector (Telecoms, Media, and Technology).