Daily Equity Report

The much awaited listing of Vodacom (share code: VOD) happened on the JSE today. Usually listings happen without too much controversy, but investors were made to wait for a high court ruling over the weekend to be sure that the listing would occur.

Trade union COSATU had brought the application to court arguing that by allowing British company Vodafone to increase its stake in Vodacom from 50% to 65%, the country was giving control of a national treasure to a foreign entity. This argument is valid, and does bring the risk that the company gets run in a fashion that isn’t beneficial to local customers, but there are many positives to the transaction.

Judge John Murphey dismissed COSATU’s application with costs, and COSATU are now urging their union members to switch their cellphone providers to Vodacom’s rivals.

The granting of the interdict (had it occurred) would not only be a blow to the Vodacom listing, but it would also have damaged South Africa’s credibility as an investment destination, which would have affected future potential foreign transactions, and by extension foreign currency flows.

Some of the benefits of the transaction are the injection of R22.5 billion of foreign currency into the country at a time when the country has a large current account deficit. We have seen large injections into the equity market during the last bull market, but these were generally portfolio flows, as opposed to the more sticky foreign direct investment (FDI) that Vodafone has made. Portfolio flows do help the currency, but they leave just as easily as they arrive, something that we saw when financial markets plunged last year. FDI is preferable as it is generally a longer term commitment by the entity, and there always is the prospect that more capital gets invested as they attempt to grow the business.

Another potential risk of the listing is that the parent company (in this case Vodafone) siphons profits out in the form of dividends being paid to the holding company, which would be a drain of foreign investment. Although investments into Africa are generally accompanied by follow up investment as Africa is seen as a growth play as opposed to a cash cow, so this shouldn’t be an issue.

With Vodacom being unbundled from Telkom as part of the listing we also today saw the share price of Telkom almost halve, as the market cap of Vodacom was taken out of Telkom and distributed to Telkom shareholders (along with a special dividend).

Vodacom traded up at nearly R65 a share early in the day, before settling back to around the R60 a share level for most of the day, and closing at R58.80. The JSE has confirmed that Vodacom will be included into the Top 40. They release their results tomorrow.

Telkom opened the day just under R60 a share and spent most of the day in this territory, closing at R60, to give it a market cap of approximately R31.2 billion, down from its Friday closing market cap of R58.8 billion.

Take care,

Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966