Telkom subsidiary Openserve has found itself in an unlikely position: despite being a low-margin, labour-intensive business that faces intense competition and regulatory scrutiny — hardly attractive qualities — it is being eyed by potential suitors.
Created in 2015 through a “deep functional separation” from the rest of Telkom, Openserve was recently legally separated from the partly privatised operator too, becoming a wholly owned subsidiary of the telecommunications group as of September 1 2022. Openserve is now at arm’s length from the Telkom mother ship, or so the theory goes.
At the time of the functional separation eight years ago, Telkom’s then CEO, Sipho Maseko, said it was about removing a “critical stumbling block” in the way of Telkom’s path to success. “Through this separation, Telkom will improve its customer focus and establish clearer lines of accountability. As a standalone business unit within Telkom, Openserve will be autonomous and will be responsible for its own profit and loss account.”
The move by Maseko signalled a remarkable shift in approach for a company found by competition authorities in 2013 to have abused its monopoly in the 1990s and 2000s, to the detriment of internet service providers and consumers.
It eventually paved the way for the potential sale of a stake in Openserve. But Telkom is unlikely to want to sell 100% or even give up control, as it is still strategic to its business, with Openserve’s fibre network a vital part of the group’s growth plans, according to Telkom CEO Serame Taukobong. But it is also keen to have a deep-pocketed investor at its side.
Last year, Openserve signalled it had started accelerating the rollout of fibre into homes. For Telkom investors, it is a pity it didn’t wake up from its slumber earlier. Instead, it chose to sweat its legacy copper assets through outdated technologies such as ADSL and Diginet, frustrating its customers who wanted fast internet. As a result, it ceded a big chunk of the market to Vumatel and other nimble fibre upstarts; Vuma’s home fibre network is bigger than Openserve’s.
That doesn’t mean Openserve is a bad business. In recent years, Telkom has done the heavy lifting needed to transform it from a legacy supplier of outdated technologies into a firm investing for future broadband demand. It is in a stronger competitive position today than it was a few years ago.
Telkom won’t easily give up control of Openserve, while MTN will likely want a meaningful say over the company’s development — and may even seek control
In the year ended March 2023, Openserve reported next-generation data products such as fibre made up 70% of its revenue base. Encouragingly, fixed-data next-gen revenue grew by 10.2%, led by the rollout of home and business fibre. Total revenue fell by 4% to R12.9bn, dragged down by the legacy technologies that once helped support the sort of profit margins Telkom will never see again. Taukobong said last month this legacy infrastructure will be gone from its network within 12 to 18 months; it’s long overdue.
In many respects, Openserve is modelled on BT Group’s Openreach in the UK, which was spun out of BT 17 years ago in a separation enforced by regulator Ofcom. Like Openserve, Openreach is run as a separate business with its own management team.
The most likely candidate to buy a stake in Openserve is MTN Group, which last year walked away from talks to buy the entirety of Telkom. That would have been a difficult deal to get across the line, both politically and from a regulatory perspective. MTN could take a less complex approach next time by pursuing a stake in Openserve instead.
Indeed, the “Yello” operator may have no other strategic choice than to pursue Openserve should its biggest competitor, Vodacom Group, get its acquisition of (up to) a 40% stake in Maziv, the new holding company of Vumatel and Dark Fibre Africa, past the Competition Commission. Though the commission is taking an extraordinary amount of time to pronounce on that deal, it seems likely to give it the thumbs-up, with customary conditions attached.
This will leave MTN in an unpleasant position: trying to keep up with a competitor that can offer consumers integrated plans with both mobile and home fibre broadband on a single bill. Depending on how a deal is structured, buying a stake in Openserve may help solve that issue for MTN, but how much will it want to buy, and how much say-so will it demand over the running of the business? Telkom won’t easily give up control of Openserve, while MTN will likely want a meaningful say over the company’s development — and may even seek control. If it gets there, it will be a tough negotiation.
Yet pursuing a stake in Openserve instead of trying to assimilate the mother ship will be much easier and more digestible, taking far less management time and getting the nod from the Competition Commission more easily.
So, what happens next? Other suitors may emerge — Telkom’s board has already rejected a proposal from a consortium that included Maseko. The smart money is now on MTN and Telkom rekindling their discussions, and soon, with the focus this time on Openserve. And Vodacom’s impending fibre deal is going to pressure them to get it done.
* McLeod is editor of TechCentral
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