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How the Telkom privatisation corpse was brought to life
SVEN LUNSCHE Looks at the biggest deal of its kind in
southern Africa
The Minister of Posts and Telecommunications and the Telkom chairman were pacing anxiously in their Pretoria offices, waiting for a telephone call from London. At 5pm UK time (7pm in Pretoria) the two remaining consortia in the bidding for 30% of Telkom had to submit their final offers to the London offices of SBC Warburg, Telkom's advisers. SBC Communications, the giant US telecommunications operator, had asked its London bankers to have a team ready on Friday morning to type, print and bind its bid offer. Final amendments were made on Friday morning and later that afternoon four thick volumes were delivered to Warburg. The documents contained a $1.28-billion offer for 30% of Telkom on behalf of SBC Communications (formerly SouthWestern Bell) and Telekom Malaysia. It also detailed a massive R53-billion capex plan to develop and upgrade 4-million new telephone lines in South Africa. Naidoo and Moseneke were dutifully informed of the documents' arrival. "We were speaking to Warburg almost every 20 minutes, getting updates," recalls Naidoo. But the call he was really waiting for did not arrive. The 7pm deadline came and went. Instead Naidoo received a call from Ron Sommer, chief executive of Deutsche Telekom, the giant German telecoms operator. "He was very apprehensive but told us that his board had asked him to withdraw the offer for Telkom," says Moseneke. The previous day Moseneke and Naidoo had been warned by Sommer of the board's resistance to the bid, but the two were still hoping for a last-minute change of heart. A third potential offer from France Telecom also failed to materialise. Only 10 days prior to the deadline the two European operators had secretly agreed to submit a joint bid. "The French were furious and so were the Deutsche Telekom team in Johannesburg who had just seen months of work come to naught," says a banker close to the deal. He says the Deutsche Telekom board conveyed to Sommer that they simply had too much on their plate, having just spent Dm20-billion on new investments in eastern Germany and Hungary during 1996. But the real reason for the last-minute withdrawal were the stiff targets set for the telephone network expansion programme. In terms of its licence requirement, released by Naidoo on February 6, Telkom was given five to six years to effectively double the telephone network in South Africa and improve telephone penetration in all provinces. In addition, Telkom was asked to improve on its hitherto poor customer service record (see map and table). "The roll-out schedule persuaded them that their resources could be better used elsewhere," an adviser to Deutsche Telekom, Tom Casey of Merrill Lynch, has conceded. It has also emerged that the final price the European consortium was willing to pay was well below the SBC Communications/Telekom Malaysia offer. After the initial disappointment about Deutsche Telekom's withdrawal, Naidoo asked for details of the winning bid. He was delighted, having got almost everything that he asked for - a price of R5.58-billion, well within government's optimistic estimates; R2.3-billion in human resource expenditures; and, most significantly, an extensive, R53-billion roll-out plan for the telephone network, comprising 2.7-million new lines, 120 000 payphones and digitising 1.25-million analogue lines. "In measuring the economic impact of this deal, the expansion plan is crucial. It will sell the deal to the communities," says Naidoo. That Friday night, SBC's man in Jo'burg, Jim Myers, a congenial Texan, was blissfully unaware of the London drama. "I received a call in the morning from San Antonio (SBC's head office) to say that Deutsche had not submitted a bid. I was stunned, but at the same time delighted," he recalls. "South Africa has enormous economic potential and the deal will be profitable for us every step of the way," he says, pre-empting queries about the targets set by the SA government. Deutsche Telekom's withdrawal proved a blessing in disguise. Telkom had prepared for a dual set of negotiations and primed an army of lawyers to deal with two lots of bidders. Instead only one team of experts and lawyers set off to London to meet with their counterparts from the US and Malaysia. The deadline given to the legal eagles was the last week before the Easter weekend. "And they did it, which is a miracle of timing," says Myers. On Wednesday, March 26, the media was duly summonsed by Naidoo to a 2pm conference at Gallagher Estate to announce the deal. After a request from London, the announcement was delayed by a further two hours before Naidoo proudly declared the deal done. In the aftermath of the successful bid, ANC politicians have finally resorted to labelling the deal a partial privatisation (it is in fact sub-Saharan Africa's largest single privatisation to date). When the Telkom deal was first conceived, and as recently as mid-1996, the p-word was taboo. While Naidoo is basking in the glory of a job well done, government's early approach to Telkom's partial privatisation is a story of policy bungles. In fact its early attempts at circumventing privatisation for its parastatals have proved a costly failure - the cost of 4-million new and upgraded telephone lines under Telkom's Vision 2000 programme has mushroomed from the initial estimate of R32-billion to R53-billion. Neither Myers or Naidoo have yet provided a breakdown of the sudden surge in the cost of the roll-out, although Naidoo suggests that the original R32-billion estimate was less precise than the figure provided by the strategic equity partners. Myers believes that the R53-billion tag is a fairly accurate assessment of the cost as SBC included so-called Request for Information estimates by most of the world's leading telecoms equipment suppliers. What remains undisputed though is that government at first vastly underestimated the task of expanding the telecoms network and failed to realise the need for a private-sector partner to provide financing, technology and management expertise. Naidoo is adamant that the process could not have commenced earlier. "Privatisation is a holistic process and has to be driven by the shareholder, the state, and not by the underlying parastatal. We also had to address the legitimate concern of trade unions about job losses." A few months after Naidoo took over the portfolio in April 1996, after his failed stint at the RDP office, he embarked on a tour to a dozen or so telecoms operators identified by Telkom in an earlier assessment. But it was only in October that the cabinet approved selling 20% to 30% of Telkom and released a short-list of seven candidates: Deutsche Telekom and France Telecom, KPN of the Netherlands, Stet of Italy, Sweden's Telia, SBC and Malaysia Telekom. SBC and the Malaysians started talking about a possible alliance. Six months later only they remain.
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