Rain proposes Telkom merge with it rather than with MTN
Upstart high-speed network operator rain has showered on the buyout talks between mobile operator MTN and Telkom, proposing that South Africa’s legacy phone company merge with it rather than with Africa’s largest mobile operator.
No formal discussions have yet taken place, and rain has not yet put any financial proposals on the table. Instead, rain, which is not listed, has made a formal request to present to the Telkom board a proposal which would result in the merger of the two companies.
MTN proposed a takeover deal last month which would be paid for in cash and shares, and Telkom’s share price jumped 33.3% to R44.6, valuing the company at about R22-billion.
Though financially lucrative for Telkom shareholders, the problem with consummating this deal is that it would result in a much more concentrated telecoms market in South Africa, something which was already a concern for competition authorities before the deal.
A merger with the much smaller rain may not be so lucrative for shareholders since it may not include a cash premium, but it may have more of a chance of clearing the regulatory hurdles.
Read more in Daily Maverick: “MTN wants to buy Telkom. How weird is that? Actually, not so weird”
Rain’s press statement heavily emphasises this point, saying some consolidation in the industry is both desirable and inevitable as it leads to better use of infrastructure. “It should not, however, be at the expense of competition which promotes greater access for consumers to data at more affordable prices.”
A ‘logical alternative’
The proposed merged entity would create a formidable third major player to compete with what is effectively a duopoly in South Africa, the company said.
Although the terms of such a transaction, such as valuation and structure, would still need to be agreed, rain believes there is a compelling business case in combining the businesses, its statement says.
But a merger with rain would be a logical alternative to simply selling to MTN “and would also be consistent with the pro-competitive policies of Government”.
“The merger would bring together the considerable infrastructure and mobile businesses of Telkom and the successful new-age 4G and 5G businesses of rain”.
Being a private company, rain does not reveal how many users are on its networks, but following its formation in 2019, the company says it has “little debt and sufficient facilities to fund its growth”.
Read more in Daily Maverick: “Telecommunications shake-up – MTN in talks to acquire Telkom”
“In line with the original projections, it is reaching critical mass and achieved an EBITDA of more than R1-billion in the year to 2022.”
Rain has focused on building high-speed networks, mainly 4G and 5G data networks. It now has more than 7,500 4G base stations that provide mobile and fixed broadband services, and more than 1,500 MIMO 5G base stations.
The company argues that the potential benefits of a Telkom and rain merger are that the number of combined rain and Telkom sites will be equivalent to that of Vodacom and MTN, and the avoidance of duplication would result in material capital and operational cost savings.
“In the recent successful spectrum auction, rain acquired additional spectrum that signalled its intention to enter the mobile market. In combining their resources, a merged entity would be able to build on Telkom Mobile’s success in 4G and, in future, in 5G which is expected to feed consumer demand for faster connectivity driven by streaming, gaming and virtual reality,” says rain chairperson Paul Harris.
“Our team’s experience and expertise have positioned us at the forefront of the Fourth Industrial Revolution. What is most compelling, however, is the potential for the merged company to rapidly unlock these growth opportunities.”
Telkom responded very briefly, saying it “notes the media statement by rain titled “rain proposes merger with Telkom” issued 11 August 2022. Telkom can confirm that no offer or proposal has been received.”
The Department of Trade and Industry’s Takeover Regulation Panel noted “with grave concern” rain’s press announcement, saying “we wish to inform the market that the announcement was issued by Rain without the prior approval of the TRP as required in terms of Regulation 117 of the Companies Regulations”.
“Furthermore, the announcement was issued notwithstanding the TRP’s instructions to rain that no such announcement should be made without the prior approval of the TRP. Rain has been instructed to retract the announcement,” the TRP said.
“In the circumstances, all parties (i.e., shareholders) and the market are advised to disregard the announcement.” Rain said it was taking legal advice. BM/DM