Telkom’s mobile business may soon be up for sale if an MTN plan to buy out the state-affiliated telecoms group proceeds, but experts say a full takeover of Telkom’s business, particularly the mobile unit, is unlikely, raising questions about what form such a deal could take.
It was reported last week that discussions about MTN acquiring the entire issued share capital of Telkom in return for shares or a combination of cash and shares were at an early stage. But there was no certainty the transaction would proceed.
While many seem to welcome the deal, given stock market performance on the day of the announcement, combining MTN and Telkom’s mobile businesses in particular appears to be the biggest stumbling block given a high level of regulation on spectrum and competition.
The deal can take on a number of structures.
The first and obvious option would be to take Telkom Mobile out of the equation. As the fastest-growing part of the group, that unit could fetch a good price, having made R21.4bn in the past financial year, or half of Telkom’s revenue.
Since the spectrum cannot be transferred, Absa Asset Management analyst Roy Mutooni believes “a spinoff of this business to a standalone” could see it “grow as a platform of MVNO [mobile virtual network operator] clients similar to the Cell C/Blu Label plan”.
MVNOs refers to operators who do not own infrastructure but lease capacity from mobile network operators. Cell C is the largest MVNO provider in SA, hosting networks like FNB Connect and Mr Price Mobile.
The competition authorities are considering a R13bn proposal that will see Remgro’s CIVH and Vodacom combining their fibre assets, a deal thought to have spurred on the proposed MTN/Telkom tie-up.
In the current environment, fibre is a strategic asset for any mobile operator. It connects many tower stations to each other and, in addition, much internet traffic for businesses and consumers goes over fibre only.
“From a fibre point of view, I don’t think there will be major objections,” says independent analyst Philip Short. “If the deal is consummated, then the government, as a shareholder in Telkom, has given the green light, and Vodacom is still waiting for regulatory approval of its stake in fibre company CIVH, so perhaps that would keep them amenable.”
While spectrum cannot be bought or sold privately, Short says the operators could find an arrangement that works while still being on the right side of the law. He points to the agreement between Vodacom and Rain as an example. Rain has a roaming deal where it uses Vodacom’s network in areas where it does not have coverage. At the same time, the companies have a deal in place where Vodacom can use Rain’s 4G spectrum.
As Telkom is already working on a plan to unlock value from its business, a crucial decision will be whether to move forward with separately listing its masts and towers business, Swiftnet. This had been slated for earlier in the year but was delayed due to volatility in the market after Russia’s invasion of Ukraine.
While regulations appear to stand in the way of the deal’s completion, there are those who think it can and will happen.
“The proposed acquisition would not have got as far as even this preliminary public announcement without the at least informal approval of government and the Public Investment Corporation, who together own over half of Telkom,” says Andrew Bahlmann, CEO for corporate and advisory at Deal Leaders International, a specialist mergers and acquisitions advisory firm.
The government, which is desperately looking for money to fund its extensive social grants programme — and also trying to help cash-strapped citizens hit by rising fuel prices while battling to ensure electricity supply — may welcome a deal that would put billions into state coffers.
“The competition authorities may have the last word, but given that competition within the mobile sector hasn’t done much to reduce high prices — which are on a par with First World prices — this deal may well get through,” said Bahlmann.
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