On the brink: Telkom is on its way down. (Photo: Gallo Images/Lefty Shivambu)
With the collapse of the MTN-Telkom deal the question of whether there will be any other corporate merger for Telkom remains. Rain is left as the only prospect for the fixed-line operator.
However, Rain stands to benefit more from Telkom than Telkom will from Rain.
“I don’t think Telkom even thought of Rain because they have been on a value unlock strategy, which entailed selling parts of the business, if not all, to realise some value. A Rain proposal is not in line with the strategy that Telkom has been on. Telkom has not been on a strategy of acquiring another business,” Peter Takaendesa, the head of equities at Mergence Investment Managers, said.
Telkom said its value unlock programme, which is underpinned by valuation, strategic imperatives and capital allocation, seeks to realise value for shareholders.
“That’s why MTN was a perfect fit in terms of strategy because they would have accelerated that value unlock. If they were to go with Rain, that’s an expensive and large transaction that will require Telkom shareholder approval and I don’t think we’ll get that because it’s simply not aligned with their strategy,” Takaendesa added.
MTN expressed interest in acquiring Telkom in July 2022. The deal would have meant that the combined telcos would become South Africa’s largest mobile operator with 50-million subscribers, overtaking Vodacom SA’s 45-million.
Then, on 14 September 2022 Rain tabled a formal, non-binding proposal to be acquired by Telkom for newly issued shares in Telkom.
This happened concurrently as Telkom was engaging in discussions with MTN about MTN buying Telkom.
“Discussions were at an early stage and had not progressed to due diligence, nor had a binding offer been received by the Telkom board of directors. The Telkom board has a legal and fiduciary duty to consider all bona fide offers,” said Telkom in a statement after MTN walked away from the deal.
Takaendesa further explained that the Telkom-Rain deal might not work because the spectrum that Rain has cannot be combined with Telkom’s spectrum, so “it doesn’t make sense”.
“The regulator probably won’t allow it and I know Vodacom will fight that [possible combination of spectrum] until the end of the world because they don’t want anyone to have a big spectrum advantage over them,” Takaendesa said.
From the recent spectrum auction Telkom paid R1.5-billion for two chunks of 10MHz in the 800MHz band while Rain agreed to pay R1.15-billion for access to two chunks of 10MHz of spectrum in the 700MHz band and for 10MHz of the 2.6GHz band.
However, Makwe Masilela from Makwe Fund Managers believes that the Telkom-Rain deal should not be underestimated.
“As much as Telkom was approached by Rain, that does not mean there are zero benefits for them. That gives Telkom the chance to do the deal on their own terms and conditions. But we must not undermine Rain when it comes to the lower LSM.”
Masilela said that during lockdown, about two years ago, Rain rose to prominence and gained “some serious market share” especially among the lower income earners because of its affordable data deals and the fact that one didn’t need to take a contract for uncapped internet.
What does either telco get from the deal?
Any business transaction needs to realise mutual benefit. What do Telkom and Rain benefit from the transaction?
Masilela said the entire battle in the telecommunications space is about fibre networks.
“As it is, Telkom has the biggest [fibre] and for MTN to be able to compete with the likes of Vodacom, it made sense for them to acquire Telkom. Rain is […] at the bottom and so for them to survive this whole story, instead of them spending money and time to lay out the infrastructure it’s better for them to be part of Telkom,” Masilela said.
Telkom has 165 900km of fibre, followed by Vodacom with 33 000km and coming in last is MTN with 23 000km.
Takaendesa explained that Rain is a largely data-centric network, which is focused on data and not on voice. “Focusing on data comes with a big problem of traffic and you will need a proper fibre network to help you deal with that efficiently if your offering will be high quality like 5G network. And that is why mobile operators want to own the fibre and not only rent it, as Rain has been doing.”
Rain makes the majority of its revenue from its roaming agreements with companies such as Vodacom who are renting its network, it was previously reported in Business Day.
“If Rain is part of Telkom it can use many other assets within Telkom. It can use the fibre in OpenServe and it would be an intercompany transaction instead of paying an outsider for the fibre. They can now share the mobile network. Effectively, Rain finds a bigger parent who’s got a lot of assets that are currently maybe underutilised, which they can use,” Takaendesa said.
Another selling point for is that the transaction would make business sense for Rain shareholders, noted Takaendesa. “From a Rain shareholder, such an outcome would be great because Rain shareholders will become Telkom shareholders so for them, the benefit is almost upfront.”
Independent equity analyst Simon Brown said on its own Rain is small and “I suspect they are finding it hard to go alone as a small player, so merging with Telkom puts them into the big league, albeit at the expense of their independence”.
Telkom, in turn, would get Rain’s brand, clients and potentially their spectrum, said Brown, making the transaction a win-win. “Combined they’d still be number three in South Africa, but a much bigger number three.”
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