To sell or not to sell…is not even a question

LORDWICK NKUNA is gravely opposed to the mooted sale of government’s stake in Telkom to bail out struggling SAA.

The question on everyone’s lips is that; ‘why would a government sell a progressive asset to finance an asset that’s not generating any desired returns?’ Another question is: ‘why is South African Airways (SAA) not raising funds using a systematic approach to financing business activities through a combination of equities and liabilities? Why are they not exploring the relationship between debt financing, equity financing and the market value of their organisation?’

Maybe the answer to that is obvious; it’s probably because they cannot afford debt financing anymore.

If an organisation changes its investment policy relative to its risk, both the cost of debt and cost of equity changes. The level of interest rates will affect the cost of debt and, potentially, the cost of equity. When interest rates increase, the cost of debt increases, which increases the cost of capital and as it stands, SAA is already considered to be over-indebted; therefore, cannot afford the debt. In short, SAA does not have financial leverage.

An organisation looking to lower its Weighted Average Cost of Capital may decide to increase its use of cheaper financing sources. … Because this would increase the proportion of debt to equity, and because the debt is cheaper than the equity, the company’s weighted average cost of capital would decrease. If you raise more debt, the Weighted Average Cost of Capital decreases: debt is less expensive than equity and the proportion of debt to equity is increasing.

So, for an organisation not to afford the cheapest form of financing (which is debt finance) is a worrying factor. What it means is that someone failed to do their job effectively by failing to maintain the organisation’s financial leverage. The financial leverage ratio is a measure of how much assets a company or organisation holds relative to its equity. A high financial leverage ratio means that the company is using debt and other liabilities to finance its assets – and everything else being equal, this is riskier than a company with lower leverage.

Again, why is Finance Minister Malusi Gigaba considering selling Telkom shares to finance SAA and not considering raising capital by selling SAA stock to investors? Well, the answer might be obvious to some but not so obvious to many. The government doesn’t want to privatise SAA and we get that, but why consider selling a stake that’s generating returns simply to save a sinking ship that should be held accountable for its failures?

Telkom produced a “solid performance” in the year to March 2017, with group revenue up 9.8% to R41bn and headline earnings per share rising 12.4%. It declared a 56% higher dividend for shareholders, which caused a sharp rise in the share price. It has been pursuing a turnaround strategy over the last three years, cutting staff costs and investing heavily in fixed and mobile broadband infrastructure. On the other hand, the embattled national carrier posted a loss of R1.5 billion for the 2015/2016 financial year. So one gets to question the rationality of what Malusi Gigaba is playing at.

The truth is it would not be the first time that the South African government sells a lucrative stake to bail out struggling state-owned companies. Government once sold its 13.91% stake in Vodacom to the Public Investment Corporation (PIC) to help fund the R23bn allocation to Eskom, another struggling SOC. At the time, the government is said to have considered a wide range of options including the sale of listed shareholdings it held directly, the disposal of listed stakes held indirectly through development finance institutions, the sale of government’s unlisted shareholdings in state-owned companies or their subsidiaries, the ring-fencing and sale of assets held by state-owned firms and the sale of other assets, such as property, owned by the state.

While the selling of stakes might not be a completely bad idea, especially considering that with Eskom it was an issue of trying to keep the lights on, the problem here is the negotiators of the deal. The people who are trying to negotiate the deal, both the Finance Minister and his deputy aren’t exactly the most trustworthy chaps out there. The Minister is known for his close links with the Guptas, while his deputy has been fingered in other scandals. It’s not a secret that anything they touch, whether above board or not, is always suspicious.

So to answer the question, “to sell…or not to sell?” the answer is No because the decision to sell Telkom’s stake has not passed the rationality test and/or the quality of being based on or in accordance with reason or logic. All decisions passed at a National Executive level should always pass a rationality test. The decisions taken at National Executive level should be coherent (not contradictory), purposeful (intended to produce certain results), behaviour guided by means versus ends analysis, decision making based on cost-versus-benefit (pain versus gain) evaluation, and an overall optimisation approach (utility maximisation) expressed in attempts to maximise advantages or gains and to minimise disadvantages or losses.

As it stands, there’s no guarantee that the R10 billion bailout will achieve the desired objective or even remedy SAA’s mess. The airline is confronted by a leadership problem, not so much a financial problem. The key to leadership success is to learn to effectively delegate both the responsibility for completing assignments and the authority required to get things done. Over and above that, transparency and integrity are very crucial.

The dire state of finances at SAA is public record and those are definitely not the type of people to be trusted with our money. SAA is unable to roll over (debt repayment obligations) because there is now significant concern over the ability to pay, not only by SAA but government as a whole Someone, somewhere, somehow must be held accountable.

Nkuna, a business and economics graduate, is keenly interested in the political economy

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