Ratings agency S&P says MTN’s potential takeover of Telkom could improve the credit rating of the two telecom operators. However, the agency warns that completing such a deal could prove to be a prolonged and complex process.
Earlier in July, MTN and Telkom announced discussions about SA’s No 2 mobile operator acquiring the entire issued share capital of the state-affiliated fixed-line provider, in return for shares or a combination of cash and shares. Talks are at an early stage and there is “no certainty the transaction will be consummated”.
With little in the way of details about how it would be structured, the possible tie-up — worth an estimated R30bn or more — has attracted much attention from public and private sector players.
In a note on Monday, S&P said it had the same stand-alone credit rating on both companies at BBB-. “Our ratings on both companies are subject to negative external influences, which the transaction could ease,” the agency said.
A stand-alone rating excludes S&P’s view of government influence and sovereign risk.
The improvement in rating for both companies remains “premature” for now but if the deal does cross the finish line, then reduced exposure to Nigerian earnings relative to SA, for MTN, and decreased ownership by the government of Telkom, would be the main reasons for a possible re-evaluation by S&P.
S&P said: “MTN’s earnings are materially exposed to SA and Nigeria, which keeps our rating two notches above the blended foreign currency sovereign rating on the two countries. If MTN’s exposure to Nigeria (versus SA) were to reduce, the sovereign rating constraint on the rating on MTN could ease.”
“Our rating on Telkom is one notch above the foreign currency sovereign rating on SA, with the extent to which it can be rated above the sovereign limited by its status as a government-related entity. If the government ownership in Telkom is reduced or eliminated, we could consider rating it an additional notch above the sovereign.”
“However, given that the deal structure and its likelihood of concluding remain unclear, any rating action at this stage would be premature.”
Like many others in the market, the agency has flagged regulatory scrutiny as the biggest hurdle to completing this transaction.
Competition authorities and regulator the Independent Communications Authority of SA (Icasa) are expected to weigh in on the proposed deal given its size, complexity around spectrum assets and how it could change the local telecom market structure.
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 another major factor in getting the deal over the line. The SA government and its investment arm, the PIC, own a combined 54% of Telkom.
Operationally S&P sees a combination of MTN and Telkom’s businesses offering many potential benefits. “The merger of the mobile businesses would add significantly to MTN's already large market position and introduce efficiencies in mobile infrastructure and spectrum use. Telkom has a dominant position in fibre broadband that would enhance MTN's position in data and related services.”
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