Once Telkom has concluded its deliberations with wireless broadband operator Rain, it’s possible – likely even – that the company will be back at MTN’s door.

This is despite the complexity involved in getting MTN Group’s proposal to buy Telkom – now no longer the subject of formal talks – across the line, including securing regulatory approvals from the Competition Commission and telecommunications sector regulator Icasa.

Telkom on Thursday morning surprised investors when it announced, via a statement on the JSE’s stock exchange news service, that its talks with MTN were off the table. That sent Telkom’s shares down by a quarter.

MTN had proposed buying Telkom for a combination of cash and shares, though the discussions never progressed beyond the early stages, and no due diligence was undertaken.

“MTN terminated discussions in relation to the MTN proposal on 18 October as Telkom was not in a position to provide MTN with assurances around exclusivity,” Telkom said in its statement to investors.

I hear MTN wasn’t keen to get involved in a game of horse-trading, where Telkom entertained competing offers. Given the complexity of the transaction and the high hurdles involved it getting it past regulators, MTN wanted a “clean” discussion with Telkom, if not outright exclusivity.

So, with the Telkom/MTN talks now officially off the table, will Telkom and Rain be able to engineer a deal? That’s unclear, but there are also big challenges involved there, too. Telkom has said Rain approached its board with a proposal that Telkom buy it. The question is, with what money? Telkom’s balance sheet is not exactly awash with cash – if it was, it would be able to compete more effectively with bigger rivals MTN and Vodacom in network roll-out and investment.

Rain valuation

Rain shareholder African Rainbow Capital (ARC) Investments in September attached a valuation to the wireless Internet provider of an eye-popping R17.9-billion – that’s more than Telkom’s current market value of R17.7-billion. Yet, on a sum of the parts basis, Telkom is by far the more valuable business. A strategic plan by Telkom management, kick-started by former CEO Sipho Maseko, should go a long way in unlocking the value trapped in the business.

Although it is under considerable pressure — its legacy fixed-line business is in terminal decline, its mobile business (the growth driver in the past decade) is running out of steam and its IT services business has been taking pain for years – Telkom still has formidable assets. These include the largest fibre infrastructure deployment of any telecommunications operator in South Africa, a massive property and towers & masts portfolio, data centres, and large tracts of radio frequency spectrum suited for mobile broadband.

Rain, on the other hand, has a network of a few thousand high sites, some spectrum access and not a heck of a lot more. ARC Investments said Rain achieved its budget of R1-billion in Ebitda (earnings before interest, tax, depreciation and amortisation) in the 2022 financial year, which ended in February. Telkom’s 2022 full-year Ebitda was R10.9-billion. Chalk and cheese stuff!

It is exceptionally unlikely, even if it could afford to do so, that Telkom would be prepared to pay anywhere near R17.9-billion for Rain. Are there creative ways of engineering a deal, one that doesn’t saddle Telkom with an unsustainable debt load, turning it into another Cell C? Perhaps.

But what would Telkom really get from Rain? Some wireless broadband customers, a 5G network (it’s now building one of these anyway – the launch is next week) and some spectrum (if Icasa allows it). Rain has said a combination of the two companies is a “logical alternative to simply selling to MTN”.

“The merger would bring together the considerable infrastructure and mobile businesses of Telkom and the successful, new-age 4G and 5G businesses of Rain,” Rain said when it first proposed a tie-up.

A Telkom/Rain combination does, at face value, appear to be more consumer friendly than a Telkom/MTN deal. Surely a strong third player is better for competition that the number-2 player buying the number 3 to create, in effect, a two-player market? But that argument makes sense only if South Africa is big enough to be a three-player market. Is it? The US was a four-player market, and consolidated into a three-player market. But the US is orders of magnitude bigger than South Africa. Telecoms is already a scale game, and only becoming more so. Cell C has already quit the infrastructure game, unable to keep up with the bigger players. What’s to say a Rain and Telkom combination doesn’t eventually meet the same fate?

More sense

For Telkom – and its investors – a deal between MTN and Telkom would make more sense, despite it being exceptionally difficult to consummate. It would give MTN access to a significant network of fibre into homes and businesses through Openserve, allowing it to compete more effectively with Vodacom, which is itself in the process of buying a big stake in the company that owns Openserve rival Vumatel. And Telkom would become part of a much bigger entity that has the financial muscle to compete head-on with Vodacom in mobile, fibre, fintech and enterprise ICT services.

It’s impossible to know yet how this story will pan out. Will Telkom and Rain find a way to make a deal work? Maybe. But if I were a betting man, I’d put my money on Serame Taukobong, Telkom’s group CEO, and Ralph Mupita, MTN’s group CEO, reengaging at some point – and probably sooner than later – about merging their businesses. — (c) 2022 NewsCentral Media