Telkom loses R7bn in Multi-Links deal

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Telkom‘s failed Multi-Links transaction in Nigeria has cost the company over R7 billion, Communications minister Roy Padayachie said on Monday.

He was responding to a written Parliamentary question by the Democratic Alliance’s Niekie van den Berg, who wanted to know the reasons for Telkom’s failed efforts to gain ground in the Nigerian telecommunications market.

Van den Berg also asked whether Telkom suffered a financial loss through these efforts.

Padayachie replied that Telkom had not yet succeeded in Nigeria primarily because it acquired a code division multiple access (CDMA) operator in a market dominated by the lower cost global system mobile (GSM) technology.

Also, the rapid expansion of the network that had to be implemented could not be supported by the underdeveloped distribution channels, thus affecting sales revenue, he said.

Some contracts were entered into which did not deliver the anticipated benefits and incurred significant operating expenses.

The worldwide economic troubles also affected the Nigerian economy.

Multi-Links did not have sufficient market share, pricing power or strategic and operational advantages to be successful in the resulting tight economic environment.

Telkom’s Multi-Links unit suffered an operating loss of R522 million for the financial year ended March 31 2009, and R1.039 million for the year ended March 31 2010.

“In addition, Telkom has been required to write down goodwill and assets of R5.823m,” Padayachie said.

Objections to losses

Replying to another question - by Julian Killian of the Congress of the People - he said as one of several shareholders in Telkom, the government raised its dismay at the write-off of “approximately R5.2bn in the Nigerian operation at the Telkom AGM (annual general meeting) in 2010.

“Telkom underestimated the highly competitive nature of the Nigerian telecommunications market and also failed to build and manage appropriate distribution channels,” he said.

The government, represented by the minister, had 38% shares in Telkom with no special rights.

On the drastic erosion of the value of Telkom shares, and whether the government intended giving the company a cash injection from state coffers, Padayachie said Telkom’s board was “cognisant of the conditions that face the company”.

“Telkom’s balance sheet is fairly strong. It is not anticipated that government will be required to inject cash into Telkom.”

Telkom’s strategic plan had a strong focus on reducing operational expenditure and improving revenue. The government would ensure Telkom’s board was strong and competent.

“The value of Telkom’s shares has been reduced proportionately by the sale and unbundling of its 50% stake in Vodacom,” he said.

About half of the proceeds from this was returned to Telkom’s shareholders as a special dividend and shares in Vodacom.

The balance was used to modernise Telkom’s network, increase its competitiveness in the mobile market by the launch of 8.ta, and retire expensive debt.

Telkom’s share value was also affected by its current and projected financial performance. This had suffered as a result of intensified competition on its fixed line, particularly from mobile operators, changes in the regulatory regime, and increasing wage costs. - Sapa