The negative market reaction came in thick and fast. Telkom’s shares fell by as much as 24% on Wednesday, wiping R6.9-billion from its value on the JSE. And MTN’s share price fell by as much as 4%, with the telecommunications giant joining the ranks of the biggest share losers of the day. 

The harsh market reaction was triggered by MTN’s announcement that it had walked away from talks to acquire Telkom — talks that have been going on for four months. 

For MTN, a successful purchase of Telkom would have created the largest telecommunications company in South Africa, overtaking Vodacom. For Telkom, MTN would have supported its growth ambitions, including expanding its more than 169,000km of fibre coverage across South Africa. 

Rain halts play

But MTN’s potential purchase of Telkom was doomed when data-only network provider Rain entered the fray.

In late September, Rain tabled a formal proposal to merge its operations with that of Telkom. The potential Rain-Telkom merger would create a telecommunications company with enough scale, radio frequency spectrum (used to transmit data signals for internet connectivity), and network infrastructure to challenge MTN and Vodacom. The selling point for a Rain-Telkom merger is that both companies would pour more capital and investments into rolling out new-age and high-speed data services such as 4G and 5G.

South Africa still largely depends on the much slower 3G and 4G services because of chronic delays in the auction of spectrum, which only happened recently. The Telkom board was entertaining Rain’s proposal, which incensed MTN enough to make it withdraw its takeover bid.

MTN wanted exclusivity with Telkom

MTN wanted Telkom to focus on its takeover advances only, and not consider a competing proposal from another company. In essence, MTN wanted exclusivity with Telkom during the ongoing acquisition talks. When Telkom cosied up to Rain, MTN started getting cold feet about the acquisition.

On Wednesday, Telkom informed investors that it “was not in a position to provide MTN with assurances around exclusivity” regarding acquisition talks.

“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,” Telkom added.

MTN also confirmed the termination of its talks with Telkom, but was a little more diplomatic: “After extensive engagements and deliberations between the parties… the parties were unable to reach [an] agreement to their mutual satisfaction on the process…”

A Johannesburg-based analyst told Business Maverick that MTN would want exclusivity in its talks with Telkom because the deal was complex, and MTN didn’t want the deal to be further complicated by the involvement of another company. There would be several hurdles to cross before getting the deal across the line. 

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First, the deal would have required approval from the government, which is the single largest shareholder of Telkom, holding 40.5% of its shares. Second, it would also be a Herculean task to get the deal to be approved by the Independent Communications Authority of South Africa (the communications regulator) and the Competition Commission (a competition watchdog). MTN and Vodacom are not in the commission’s good books as the watchdog has trashed the two companies for their dominance in South Africa’s telecommunications industry.

The commission ran a two-year probe into mobile data costs and found that Telkom and Cell C have been “unable to effectively constrain” the MTN and Vodacom “duopoly”. If Telkom were to become part of MTN, the commission would probably argue that there would be even less competition and choice for consumers.

The commission has also criticised MTN and Vodacom for their high mobile data prices in South Africa, a function of their dominance (it argued), and recommended that they “must… within three months… offer all prepaid subscribers a lifeline package of daily free data to ensure all citizens have data access on a continual basis, regardless of income levels”.

The withdrawal of MTN means that the Telkom board will likely consider Rain’s proposal. And the Competition Commission might see it as a merger of equals (sort of), but Telkom is bigger than Rain on a financial earnings basis.

Telkom pulls in annual earnings before interest, tax, depreciation, and amortisation (Ebitda) of about R12-billion while Rain generates R1-billion. MTN’s Ebitda is substantially larger at R80-billion. DM/BM