Case Study
The IPO of Telkom South Africa

Prof. Ian Giddy, New York University

SouthAfrica raises $500 mln in Telkom IPO
Tuesday March 4, 10:34 am ET
By Hilary Gush and Jodie Ginsberg

(Updates Jo'burg closing share,New York debut paragraph 6-7)

JOHANNESBURG, March 4 (Reuters) - South Africa raised nearly four billion rand ($500 million) on Tuesday in a fanfare listing of phone utility Telkom, laying the basis for more sell-offs in the country's drive to win global financial approval.

It priced the initial public offering at 28 rand a share, near the low end of its offer range, earning 3.9 billion rand. This was less than half the 10 billion rand the government had planned to raise a year ago from its major privatisation after a steep fall in the industry's stock market value.

"We expected higher amounts than we have now," Finance Minister Trevor Manuel said. "If we had held off because of uncertainties... we may never have listed. I think that the credibility of government would be questioned a lot more."

The share closed up 0.7 percent at 28.20 rand. The operator -- which has five million fixed-line users and some eight million mobile users in Africa, the world's fastest growing telecoms market -- was the most actively traded stock by deals. It kicked off trade in New York (NYSE: TKG - News ) at $14.10. American Depository Shares (ADS) were priced at $13.98 each. There are four ordinary shares to one ADS.

The Telkom IPO was two years in the making, having been delayed by changes in telecoms policy. Delays in fixed-line competition have also extended Telkom's monopoly. The firm became only the second pure-play telecoms stock listed in Johannesburg after cellphone group MTN.


The government calls the listing of a quarter of Telkom its "landmark" deal, signalling state commitment to privatisation -- a factor holding up an upgrade of the country's debt rating.

"(This listing) bodes well for future transactions," Public Enterprises Minister Jeff Radebe told the lavish gathering. Sources close to the deal said the order book was more than two times covered, with keen demand from U.S. retail investors. "Most people should be very happy with this, as it is a very favourable price, but it is not at the absolute bottom of the range, which shows there was good demand," said Steve Minnaar of the country's biggest fund manager Old Mutual Asset Managers.

Manuel said the funds would be used to cover some of the budget deficit of 1.4 percent of gross domestic product. The IPO lent support to the rand (ZAR=), sending it to a peak of 7.92 to the dollar from around 8.05 late on Monday.

The government issued 139.3 million shares to investors. More than 127.2 million went to institutional and retail investors in the United States, and to other institutional investors in South Africa and abroad. At home, the remaining 12 million went to retail investors, the issue's sponsors said. They can also issue another 21 million shares in the next 30 days to steady the market.

The offer values Telkom at 15.6 billion rand -- sharply down from its 100 billion rand valuation a few years ago, before telecoms stocks globally went into freefall. On Monday, South Africa cut the share price offer range to 27-30 rand from 33.50-40.90, citing volatile equity markets.

The IPO is South Africa's biggest attempt to spread share ownership among the black majority in an economy still dominated by whites nine years after apartheid ended. Ahead of 2004's election, the ruling ANC must ensure the public is not hurt by any steep fall in Telkom shares. It offered some buffer by giving local retail buyers a discount.

The long-delayed partial privatization included an unusual pricing scheme. Members of a group of South Africans classified as "historically disadvantaged individuals" were offered a 20% discount to the offering price on the shares. The discount, known as the Khulisa offer, was made available to those individuals who were denied the right to vote or otherwise discriminated against under apartheid. In addition, if these individuals hold on to their shares for two years, they will qualify for a loyalty bonus of one extra Telkom share for every five shares they own. All other South African citizens were allowed to buy shares at a 5% discount to the offering price.


Officials are keen to avoid the experience of firms such as widely-held Deutsche Telekom  and France Telecom, whose investors have seen their shares slide 90 percent since 2000.

Radebe said the listing "made a significant contribution to the deracialisation of the securities environment". But the government faces opposition from its labour allies, who fear more job losses from the listing. Telkom has already slashed its workforce by more than a third to around 38,000. About 30 percent of South Africa's workers are unemployed.

In the year to end-March 2002, Telkom had revenue of 34 billion rand, and posted net profit of 1.2 billion rand.

SBC Communications Inc  of the United States and Telekom Malaysia Bhd  jointly own 30 percent of Telkom. The two paid more than 5.5 billion rand for their stake in 1997.

Telkom's American depositary receipts were listed at $13.98 and closed the first week of trading at $14.09 after dipping to $13.90 in their debut. One ADR is equivalent to four ordinary shares. Bank of New York was selected as depositary for the ADR program.

According to Telkom's prospectus, the company is the largest communications provider in Africa based on operating revenue and assets. Telkom owns 50% of Vodacom, South Africa's largest mobile telephone network, with 7 million subscribers. UK-based Vodafone owns 32% of Vodacom.

The Telkom offering was one of the few IPOs to make it to market in recent months, and it came at a time when telecom issues are not generally in favor with investors. The IPO raised about $500 million for the South African government, which sold 25% of Telkom's shares.

Deutsche Bank and JPMorgan Chase were underwriters for the global offering.

Minister Radebe says the government plans to sell shares in state-owned electricity utility Eskom in the near future. One goal of the privatizations is to create a new class of shareholders, he says. The Telkom listing process was accompanied by a massive public-education campaign in South Africa.


South Africa Privatizes Telkom

March 27, 1997, Reuters

South Africa privatized it's state utility Telkom on Wednesday by selling a 30% stake to a consortium from the United States and Malaysia for $1.261 billion.

The consortium is comprised of the U.S. company SBC Communications Inc., based in San Antonio (Texas), and the Malaysian Telekom Malaysia Bhd. SBC, which is the corporate parent of Southwestern Bell will pay 60% of the purchase price, and Telekom Malaysia the remaining 40%.

South Africa will reinvest $1 billion of the deal into the South African Telkom for an expansion of the infrastructure, with the remainder going to the South African coffers to cut the government's debt.

South Africa's Telkom will receive a five year exclusive on fixed-line telephony service, and has committed itself to one of the world's fastest telecommunications infrastructure expansions, with 2.8 million new phone lines, including 120,000 payphones, over the next five years.

This deal is the first major privatization of a South African state run operation, and is believed to be the largest foreign direct investment in South Africa ever.


1. Why did South Africa follow its initial 30% privatization of Telkom with an initial public offering? What are the advantages and disadvantages of a public listing for a company?

2. What is an ADR? Why did Telkom use the ADR technique in conjunction with its Johannesburg IPO?

3. What does a company have to do to ensure a successful IPO? What makes shares attractive to investors?

4. Was the Telkom IPO priced correctly? How would you value a company in order to judge the price for an IPO? | | | | contact
Copyright ©2003  Ian Giddy. All rights reserved.