Telkom listing leaves empowerment group in pickle
THE low price at which Telkom listed has been criticised and praised in government and business circles. At R28 a share, Telkom was valued at R15,6bn on listing, against a valuation of R19bn when a 30% stake was sold to US and Malaysian investors in 1997.
While there is lots of upside potential for small investors, the lower-than-expected valuation has left Ucingo Investments, the empowerment group which holds 3% of Telkom, in a pickle.
Ucingo acquired its stake in the phone monopoly in 2000 at a share price of more than R33, funding the R566m bill entirely through debt financing.
This took place during the midst of the telecommunications boom globally, and lenders presumably envisaged enormous growth potential for Telkom.
Shortly after Ucingo took delivery of its shares, the 3% stake was valued at about R3bn. Ucingo had grand plans. These included selling a portion of its holding after Telkom listed, hopefully at a profit. The proceeds were to be used to establish about 360 telecentres over five years, at a cost of about R100m. These would include telephones, photocopiers, computers, faxes and access to the internet.
However, with Telkom's valuation sliding along with the bursting of the telecoms bubble, Ucingo is facing a cash crunch. It has turned to government for help, no doubt pointing out that another black economic empowerment failure will not do the empowerment initiative any good.
Government appears unwilling to intervene, and rightly so.
What could it do, anyway buy back the 3% stake for more than it is currently worth? That seems unlikely. However, if Ucingo is unable to restructure the debt the lenders may decide to foreclose, leaving the bankers holding a stake in Telkom.
Given the experience of Ucingo and other empowerment groups, more innovative ways of empowering companies in a bear market must be considered.
More or less is right
TOWARDS the end of last year the SA Institute of Chartered Accountants called on its members to comment on the changes the International Accounting Standards Board proposed making to its rules on the treatment of share-based payment systems.
The board wants companies to recognise all share-based payment transactions in their financial statements, including share options and phantom share schemes. SA auditors' collective response to this proposal is not yet known, but from the point of view of shareholders the issue is clear-cut there is no respectable argument against the expensing of share options. They are a form of compensation that involves an economic cost, so it makes no sense for accounting rules to treat them any differently from cash compensation or the award of actual shares.
The global technology sector remains implacably opposed to expensing, and understandably so. By some estimates, having to expense share options would cut many tech firms' reported profits by as much as 70%.
As was to be expected, the most voluble opponents are in the US, where the Financial Accounting Standards Board announced earlier this month that it was reopening the debate. Round one was won by Silicon Valley after intense lobbying. However, too many corporate governance scandals have been revealed for them to pull that off again.
There is room for debate over how the cost of options should be calculated, and there are sound arguments that the most commonly used method, the Black- Scholes model, produces excessive values.
Yet protests that estimates of stock option expenses are only approximations are disingenuous many accounting steps are approximations. Anyway, it is better to expense inaccurately than not to expense at all.
If US growth stops
THE threat of war is not the only impediment to the US economic recovery. The post-bubble adjustment continues: excess capacity has not gone away and companies remain focused on balance sheet repair.
The decline in stock market wealth is one reason for concern about US consumer spending. That, along with a weak jobs market and war fears, explains why the US Conference Board's index of consumer confidence fell to its lowest in nine years in February.
However, clearly the rise in oil prices, with West Texas Intermediate crude up from $25 a barrel in November to as high as $38 at one stage, is worrying when the US economy is already at stallingspeed. High energy prices eat into corporate profitability but expectations concerning the capital spending recovery should already be modest.
Of greater concern is the tax effect on consumer spending; income spent on fuel is desperately needed to keep other industries afloat. Unfortunately, the consensus that oil prices will quickly recede following a short war in Iraq may be too sanguine. While the northern hemisphere winter is coming to an end, the International Energy Agency has highlighted the Organisation of Petroleum Exporting Countries' limited spare capacity.
Venezuela's problems continue, and inventories in oil exporting countries are low. If the US is forced to dip into its strategic petroleum reserve, that will have to be replenished.
Goldman Sachs commodity researchers argue that, even in the event of a short war, oil prices will remain volatile. They could average in the mid-30s this year, rather than falling to the mid20s in line with the consensus.
To a large extent the fate of SA and the rest of the world economy rests on the US. Morgan Stanley estimates that the US has accounted for two-thirds of total global growth since 1995. If the US economy stumbles again, neither Europe nor Japan look ready to take over as a growth engine.
Cape Editor Dave Marrs edits The Bottom Line. E-mail to bottomline@bdfm.co.za
Mar 18 2003 06:49:43:000AM Business Day 1st Edition