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01 MAY 2014
Telkom chief prescribes the right medicine
by Thabiso Mochiko

Photo: Flickr, iphilipp.
Telkom CEO Sipho Maseko, charged with reviving the fixed-line operator, says the patient has been stabilised, and although it is still in intensive care, "the patient won’t die".

Telkom, Africa’s largest fixed-line telephone group and once the darling of its sector, has lost its appeal in the past few years. Now, with new management at the helm, the company with a history of more than 130 years appears to be ruthlessly implementing a turnaround strategy. It is winning approval from analysts, and now has a board and management team that are in sync and seem to be focusing on one goal: to save the ailing business.

Since the appointment of Jabu Mabuza as chairman in November 2012, Telkom looks to be returning to the days of Sizwe Nxasana, who ran the company like a well-oiled machine and had the board’s support to execute strategy. He left in 2005.

A year has passed since Mr Maseko took over the hot seat. He has said the right things and the market seems to like the decisions he has made: Telkom’s share price has risen 154% in the past year.

Mr Maseko showed his determination to turn Telkom around early on, announcing a number of key decisions within a few months of joining: the R12bn impairment of its legacy network, the settlement of the decade-long dispute with the Competition Commission over anticompetitive complaints from internet service providers (ISPs), and the capping of the potential liability from the post-retirement medical aid, a move that is likely to save Telkom substantial cash.

In a show of his seriousness about cutting costs, he took away perks such as year-end functions, bottled water and long-service awards, and sought discounts from suppliers. He also improved Telkom’s relationship with labour unions. Where negotiations with unions had been fractious, and sometimes resulted in strikes, under Mr Maseko Telkom has agreed on a three-year wage increase that addresses the disparities that have long been a source of dissatisfaction for employees.

Mr Maseko is a man on a mission, and there is more than his reputation at stake as he has invested his own cash in the business. In July last year he bought 52,520 shares for about R1m. Other board members, including Mr Mabuza, have also bought shares.

Mr Maseko, who is Telkom’s sixth head since 2005, says when he joined Telkom he tested some of his hypotheses for saving the business with the board. One was the issue of impairment. "It was not a question of why should we impair, the issue was around how much," he says.

"I am receiving support and guidance from the board. They are commercial people and their advice helps me with my own blind spots. I can lean on their experience."

Mvunonala Asset Managers research analyst and portfolio manager Farai Mapfinya is among the analysts who think Mr Maseko and the Telkom board have so far done a good job.

"We had concerns about whether he would be allowed to execute his proposed strategy with no hindrance, and it appears thus far he has been given the freedom to execute the turnaround strategy," Mr Mapfinya says.

Gareth Mellon, information and communications technology team leader at consultancy Frost & Sullivan Africa, says that since assuming the role of CEO, Mr Maseko has shown decisive leadership and his willingness to address key issues has been well received. He has "certainly improved perceptions" of the company, resulting in better relationships with stakeholders and potential partners, Mr Mellon says, noting the impressive performance of the company’s share price.

Telkom is in phase one of its tough turnaround strategy, which may take three years. This first phase includes preserving revenue, stemming the decline in earnings and market share, and reducing the group’s considerable costs — chiefly employee costs, which the company will have no choice but to take drastic action to reduce.

Telkom is smaller than both MTN and Vodacom but, worryingly, its workforce of 21,000 is three times the size of its rivals’. Discussions with trade unions will begin in the coming weeks.

It is also facing strong competition from mobile operators, and the proposed Vodacom-Neotel merger poses a threat. The core fixed-line business remains under pressure in a rapidly changing environment. However, Mr Mellon says, there are signs it is leveraging both its infrastructure base and its existing relationships with major corporate clients more effectively than it has done in the past.

Telkom used to be a big monopoly with deep pockets, and was respected by the industry. But it lost its way after Mr Nxasana left. A series of poor decisions followed, with Telkom often overpaying for inappropriate acquisitions. Its value and share price dropped severely after it sold Vodacom, its main cash cow, in 2009. Since then the board and executive team have been unstable, with numerous reshuffles failing to change the company’s fortunes.

Telkom is implementing the recommendations by the Competition Commission following the settlement of their long dispute. Among the requirements is the accounting separation of the retail and wholesale operations, to ensure there is no price discrimination against other ISPs. This means Telkom will no longer offer preferential treatment to its ISP. Implementing this is expected to take three to five years. "We are on track to meet everything. But we aim to go beyond that agreement," Mr Maseko says, without elaborating.

Other programmes that are being implemented include combining the mobile business with the fixed-line consumer retail unit. This follows an infrastructure deal that will result in MTN managing Telkom Mobile’s network infrastructure. This is expected to enable Telkom Mobile to push forward its break-even by a year, from 2015. This may be a big ask given Telkom Mobile’s scale: it has just 1.5-million customers.

However, the revenue boost from the recent cut in the mobile termination rate it pays could help it in its drive to attract more customers. Mr Mapfinya says, though, that while Telkom Mobile could enjoy significant tailwinds from legislative changes, "we do not think it is nearly enough to help them achieve that", referring to reaching break-even earlier than the five-year target set in 2015.

Telkom has also established a small to medium enterprise operation to focus on developing solutions for that segment. Moreover, it will incorporate its once stand-alone wireless network unit, Swiftnet, to strengthen its WiFi network programme. Telkom is aggressively rolling out a WiFi network, mainly in public places, and Swiftnet will be used to complement this.

Telkom is working round the clock to revive its brand and "own the homes", as Mr Maseko puts it. The plan is to provide more bundled services that in future will include video on demand. "We want to be the ultimate provider of communications solutions (to consumers, small businesses and corporations)," he says.

Another milestone he and the board have achieved is to mend the relationship with shareholders, especially the government. Mr Maseko says shareholders and potential investors want to know whether there is a clear strategy, and a sound financial framework and investment plans.

Asked whether there are any areas he feels could have been addressed better, Mr Maseko says he should have appointed his executive team faster, and should have been a lot bolder in some of the cost initiatives.

Key to his plans is improving customer service. "I should have looked into the issue of customer service faster and deeper, but we are on the right track," he says.

Mr Maseko has said before Telkom wants to be "a maniac about customer services and experience". One of the initiatives is that key managers and executives will adopt Telkom stores and speak to customers every month to gauge their experience. The company has also launched a customer experience unit.

One wonders whether Mr Maseko would have taken the job, knowing what he knows now. He says Telkom’s challenges are tougher than he expected. "The issues are deeper than I thought. But employees are tired of being on the losing side. There is a lot of energy and that gives me the (motivation) to keep going."
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