MTN may just pull off its touted takeover of state-affiliated communications company Telkom, in a deal that has the potential to create SA’s largest telecommunication operator, experts say.
On Friday MTN revealed that discussions about acquiring the entire issued share capital of Telkom in return for shares or a combination of cash and shares are at an early stage and there is no certainty the transaction will be consummated.
While market players cheered the prospect, sending shares soaring more than a quarter, questions have been raised about whether MTN can overcome scrutiny from legislators and regulators to get the transaction approved.
For years competition authorities and the regulator have regarded the dominance of MTN and Vodacom, which hold a combined three-quarters of the 100-million mobile customers in SA, as a source of inefficiency in the local market.
The Competition Commission, which assesses local competitiveness across industries, previously highlighted “certain market features” that “serve to perpetuate the first mover advantages of Vodacom and MTN, and that the failure to regulate these in the past has contributed to this dynamic”.
“The larger subscriber base and levels of profitability of the two largest networks provide them with a considerable advantage in rolling out new technologies and services relative to the challenger networks,” the authority said after an inquiry into the local data services market.
In its draft Mobile Broadband Services Regulations document, issued in 2021, the Independent Communications Authority of SA (Icasa) said MTN and Vodacom have “significant market power” in retail mobile services, site infrastructure access in a number of municipalities nationwide and in wholesale national roaming.
Duopoly
This stance against the dominance of the two large operators had long been taken by former Telkom CEO Sipho Maseko.
“With all of the work we have done, we only have about 12% or 13% market share.
“It just goes to show how entrenched the duopoly is. Not just in terms of brand but in terms of distribution, in terms of the spectrum,” Maseko told Business Day in 2019.
This may explain why an announcement of the acquisition talks was made soon after his departure in June.
Telkom’s shares rocketed in response to the news, closing 26.08% up at R42.25, their best day since listing in 2003.
This added about R4.46bn in market value, bringing the total to R21.6bn on Friday. MTN, valued at R267.32bn, was up 5.19% to R141.87 per share.
Telkom, which in 2020 valued itself at roughly R100 a share, has been working to unlock value from its sprawling structure.
It had been expected to separately list its masts and towers business, Swiftnet, earlier in the year but delayed the transaction because of volatility in the market after Russia’s invasion of Ukraine.
Dominic Cull, a lawyer and founder of Ellipsis, which specialises in telecommunications law, said: “We don’t have full details of the deal but I find a complete acquisition to be unlikely because of the regulatory barriers.
“We’re dealing with a dominant player in the mobile market and a dominant entity in fixed market. We’re dealing with what would be a consolidation of spectrum licences, which would be highly unlikely to pass muster from the commission or Icasa.”
Cull expects a deal structure that would leave out the Telkom Mobile business, in its current form, in favour of one focused on scooping up its fibre assets.
With MTN aiming for 100% of Telkom, the state’s willingness to let go of one of its better-run companies is likely to be a big factor in getting the deal over the line. The SA government and its investment arm, the Public Investment Corporation, own a combined 54% of Telkom.
Strategic
Independent analyst Philip Short said: “One would think that initial talks would’ve happened up to now, one being about government being willing to give up its stake.
“You also have a prominent politician, Mcebisi Jonas, as MTN’s chair, who would’ve voiced internal resistance if the government was strongly against a deal.
“From my point of view, the government could view MTN as a capable and strategic partner in rolling out fibre to the rest of SA, and that could be the silent agreement between government and MTN.”
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