Telkom's property poser

TELKOM should – if it’s not already doing so – investigate options to divest its property portfolio, including its Pretoria central business district office blocks.

Such a move would create shareholder value and take Telkom [JSE:TKG] into a new and modern corporate space that will signal its intention to become more efficient.

Selling off some or all of Telkom’s real estate could give Africa’s largest fixed-line telephone group significant financial flexibility – which in turn would maximise shareholder value.

The company, which is in the process of shedding excess weight, could use proceeds from the sale of its properties to invest in brand positioning. It could add firepower to its strong balance sheet and also invest in much-needed broadband access.

One of SA's largest real estate portfolios

Telkom says its property portfolio has arisen through various purchases throughout its long history, which goes back to its role as part of the old apartheid South Africa's postal services.

This role has been recently revived by President Jacob Zuma through the introduction of a new ministry of telecommunications and postal services led by Siyabonga Cwele.

If one travels around this vast and beautiful country one is likely to come across disused Telkom properties, some of them dilapidated. This is a drain on Telkom, which has to pay huge amounts for security and maintenance.

If Telkom is not using these buildings, isn’t it more prudent for the company to sell them off and create value?

Ian Russell - Telkom’s chief procurement officer, who was appointed in February 2014 - says in the company’s integrated annual report, published on Monday July 28: “Doing this issue justice is a complex discussion, but let me try and summarise it quite briefly.

"The portfolio includes land that we have acquired, for example, in establishing our regional and head offices, our networks, masts and towers, our retail outlets, and our back-office contact centres.”

He further notes: “Understandably we are now asking ourselves whether this huge portfolio is appropriate for a 21st century communications company.”

Unfortunately, time is not on Telkom’s side to procrastinate on whether to sell or not, as costs related to managing these properties are escalating and contributing to the company’s excess weight.

Russell is best advised to reflect on whether Telkom still needs all its empty buildings in small towns.

I suggest that Telkom sell these buildings to the highest bidder or to government agencies.

“We have started our analysis to see how we can maximise shareholder value from this asset base,” says Russel.

Empowerment considerations get in the way

However, it seems as if the process to divest Telkom’s properties is being delayed by considerations of broad-based black economic empowerment (B-BBEE). Whether this is right or wrong is debatable, depending on which side of the B-BBEE one belongs.

It might very well be that Russell and his team are seeking credible B-BBEE companies to buy these redundant assets.

This argument is reinforced by Russel’s assertion that: “Telkom has a valuable asset base that, with some creativity, can be used effectively to empower enterprise development and make a positive contribution to building the South African economy. I think we can drive some very exciting initiatives as part of our enterprise development strategy with our supply base.”

This begs the question: why is Telkom taking so long to get rid of this real estate portfolio, which is not generating any income?

Russell says while no decisions have been made, the move to sell or not to sell should be in line with Telkom’s vision and strategy, so that “we can create a fit-for-function property story”.

 “We plan to finalise this strategy, and our five-year implementation plan, during the second half of the 2015 financial year and will be presenting to the board for their consideration,” says Russel.

“In doing so, once we have a more detailed appreciation of the full nature of property assets, we will be reviewing the implications for the balance sheet.”

For now it seems as if 2015 is a long wait to implement any strategy that could save Telkom billions of rands.

Russell agrees that the facilities management bill, particularly in terms of energy, is substantial for the fixed-line telephone group and is “placing a significant cost burden on the business”.

If I were a Telkom investor, I wouldn't care who gets their hands on Telkom’s lucrative real estate portfolio.

I would be interested in whether Telkom executives can find a best way to derive more value for my investments, and if that’s done through selling the properties to a B-BBEE firm/s or a big real estate company this wouldn't concern me.

I would be focused on getting a fat dividend in 2015, which is likely to be reinstated by Telkom executives, subject to the company delivering stellar performance.

 - Fin24

*Gugu Lourie is a former correspondent for Thomson Reuters, Business Report, Finweek magazine and Fin24 (writing a blog titled 'Googled'). He is the editor of Views expressed are his own. Follow him on #twitter @LourieGugu.

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