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Telkom considering impairment of legacy assets

Telkom considering impairment of legacy assets

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5th June 2013

By: Chanel de Bruyn

Creamer Media Senior Deputy Editor Online

  

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Analysts have viewed Telkom’s announcement that its board of directors is considering impairing the carrying value of its legacy network as a positive move.

Telkom group CEO Sipho Maseko on Wednesday morning told shareholders in a statement that the decision to impair the carrying value of the group’s legacy network would draw a clear line between the historic position of Telkom and its future as a network provider of high-speed, quality broadband.

“In effect, such a decision will allow us to ‘reset our base’ and be competitive. It will also send a clear message to our stakeholders that we are prepared to take bold action to ensure that Telkom is positioned to succeed. It is important for us to focus on sustainable earnings going forward and the market segments where Telkom has a competitive advantage,” he said.

Frost & Sullivan information and communications technology senior industry analyst Gareth Mellon commented that the decision was a proactive one and reflected positively on Telkom’s efforts to recapture market share and make up for the loss in its fixed-line revenue.

“The decision to impair the assets is positive in that it provides a more realistic calculation of the company’s value that is in line with market expectations. The fact that the value has decreased is a reflection of the previous accounting figure over-valuing the assets and the impairment removes that difference," he said.

Mellon added that it was also a positive signal to the market and followed on the “significant” recent appointments by Telkom. This includes the appointment of Maseko, who succeeded Nombulelo Moholi as group CEO, as well as the appointment of Brian Armstrong as COO and Miriam Altman as group head of strategy.

“Shareholders are likely to take the view that they are aware of the challenges that Telkom is facing, that this is only a financial adjustment, and that the internal initiatives that have been set in place are addressing some of the challenges,” he noted.

Meanwhile, International Data Corporation telecommunications programme director for Africa Spiwe Chireka said the move by Telkom was “expected”, given the fact that the group has been moving to its new next-generation network, as well as the fact that it has allocated a significant chunk of its capital expenditure (capex) to the development of the new network.

She added that the impairment of the group’s legacy infrastructure was probably more out of necessity than choice, given that, as it moves to its new next-generation network, which was to be the core of its future services, the value of its legacy systems would decline to some extent.

Telkom stated that the group, in line with other fixed-line incumbents globally, has, for more than a decade, faced technology changes, competition from mobile operators and an evolving regulatory landscape, which have contributed to lower investment returns from its legacy network assets.

“The group continues to invest significant capital into upgrading its fixed and mobile network to meet the increasing needs of customers, particularly regarding data transmission.

“The migration of services from legacy assets to superior Internet Protocol-compliant assets will rapidly escalate over the next few years, ensuring services remain differentiated from competitors and competitively priced. This transition will also enable the group to improve its operational efficiency,” it noted.

Telkom would not yet confirm the quantum of the noncash impairment charge and said it would communicate the possible impact of the impairment on earnings once the board had made a decision.

It emphasised, however, that the noncash impairment charge would not have an impact on the group’s strong cash position, its low indebtedness or its ability to fund its capex programme from its own resources.

Edited by Creamer Media Reporter

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