David versus Goliath – A tale of two telecommunications companies


On Tuesday, June 14, 2022, Telkom released its annual financial results for the fiscal year ended March 31, 2022, revealing a company struggling to grow.

Revenue fell 1.1% to R42.8 billion, and earnings before interest, tax, depreciation and amortization (EBITDA) fell 0.5% to R11.9 billion.

Telkom also revealed a negative free cash flow of R2.1 billion, partly due to the spectrum auction which cost the company R1.1 billion.

There were a few positives.

Telkom Mobile increased its customer base by 10.5% to 16.9 million subscribers, of which 62.9% use broadband services.

Openserve has increased the number of households by 52.7% over the past year, while connected households have increased by 38.4%.

Telkom CEO Serame Taukobong pointed out that in the second half of the year, the number of fixed broadband subscribers increased for the first time in several years despite the drop in the number of ADSL subscribers.

Despite these positives, the market did not like what it saw. Declining revenue and negative cash flow have raised concerns about Telkom’s outlook.

Telkom’s share price has fallen more than 12% since the release of its financial results. It is down 35% since the start of the year.

On the same day as Telkom’s results, Remgro made its Capital Markets Day (CMD) presentation with a focus on one of its key growth assets, Community Investment Ventures Holdings (CIVH).

CIVH is the holding company of Dark Fiber Africa (DFA) and Vumatel, which in turn is managed by the new FibreCo.

FibreCo is a placeholder name for the new entity. CIVH and Vodacom have yet to announce what they will call the combined company.

Vodacom is set to acquire 30% of FibreCo and add its fiber-to-home, fiber-to-business and fiber-to-base station networks to the new infrastructure company.

CIVH said the combination of FibreCo’s networks and operations with Vodacom’s fiber assets will increase the open-access fiber footprint to ensure greater market efficiency.

Vumatel also holds a 48% stake in Herotel, which plans to reach 440,000 homes with its fiber network. Herotel currently has 65,000 fiber customers and 71,000 wireless subscribers.

CIVH said the existing Herotel network could act as a catalyst for Vumatel’s low LSM products in secondary towns and villages.

CIVH will become an anchor shareholder and capital provider to fuel Herotel’s future growth.

Unlike Telkom, which struggled to convince shareholders that this was the place to put their money, CIVH is the newcomer to the block.

Its ambition is to become the first open access wholesale fiber network in South Africa. With deep pockets and the reach of Vodacom, it’s the company to watch in the broadband market.

The image below shows the FibreCo structure after the Vodacom transaction.

The most interesting part is to compare the valuation of FibreCo with the market capitalization of Telkom.

Vodacom will pay R6 billion in cash for its Fibreco shares, with an additional payment of R3 billion based on its assumption at the time of the transaction.

Vodacom will also contribute its fiber assets to FibreCo at a valuation of R4.2 billion for FibreCo shares.

The transaction gave CIVH – and essentially FibreCo – an implied valuation of R44 billion as of December 31, 2021. This valuation excludes Herotel’s stake.

Telkom, by comparison, had a market capitalization of R18 billion on June 15, 2022. This makes FibreCo’s valuation 2.4 times larger than Telkom’s market capitalization.

What stands out is that Telkom’s assets dwarf those of FibreCo.

The main assets of FibreCo are:

  • Vumatel’s 30,000 km fiber network and its 450,000 connected households.
  • DFA’s 13,800 km network and its 20,000 connected towers and 22,000 connected commercial buildings.
  • VumaCam’s 3,000 small cell poles.

Telkom, by comparison, has huge strengths in a wide range of telecommunications services.

Telkom’s main assets include:

  • Openserve’s 169,000 km fiber network, which reaches most parts of South Africa.
  • A large mobile network with 7,313 active mobile sites and significant spectrum resources.
  • Swiftnet, with a portfolio of 3,916 towers.
  • Gyro, with a large real estate and data center portfolio.
  • BCX, with a strong presence in the corporate market, generated revenue of R15.3 billion.
  • A large subscriber base – 17 million mobile customers, 584,189 fixed broadband customers, 997,000 fixed lines and 389,109 fiber subscribers.

This raises the question of why Telkom, with such huge assets, has a market capitalization much lower than the valuation of CIVH/FibreCo.

The main reason is that the investment community has lost confidence in Telkom, which is majority owned by the government and the PIC.

Telkom is still a cornerstone of South Africa’s telecommunications market, but poor strategic decisions and lackluster financial performance are scaring away investors.

CIVH, by comparison, has earned shareholder confidence and its robust business model convinced Vodacom to invest around R9 billion in cash in FibreCo.

The table below compares the assets and valuation of CIVH/FibreCo and Telkom.

Telkom v CIVH/FibreCo
Evaluation Telkom CIVH/FibreCo
Market cap/Valuation 18 billion rand 44 billion rand
Financial datas Telkom CIVH/FibreCo
Revenue R42.8 billion R6.0 billion*
EBITDA R11.9 billion R3.6 billion
Overall income R2.8 billion R0.03 billion
Capex 7.5 billion rand R3.6 billion
Net debt R14.1 billion R14.7 billion
Operational data Telkom CIVH/FibreCo
fiber network 169,000 km 43,800 km
Fiber subscribers 389 109 450,000
Fiber to base station 20,000 8,655
Business services 22,000 41,368
Mobile customers 16,936,464 0
Broadband Subscribers 584 189 0
Mobile sites 7,313 0
Towers 3,916 0
Data centers Yes Nope
Mobile spectrum 192Mhz 0Mhz
*Estimate based on Vumatel and DFA revenues in the previous fiscal year.

Now Read: Telkom’s Impressive Fiber Reader


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