In the biggest shake-up in SA’s telecom sector in more than 15 years, MTN — Africa’s largest mobile phone group — recently announced it was in talks to buy Telkom.
The proposed transaction is the biggest in the sector since a 2008 deal by partially state-owned Telkom to sell its 15% stake in Vodacom to British mobile giant Vodafone for R22.8bn.
However, the proposed MTN-Telkom tie-up raises several questions, considering that in 2015 a similar proposed transaction was scuppered by the country’s competition commission over concerns of decreased competition.
Analysts, weighing in on the merits of the proposed transaction, warn if MTN sought to buy Telkom’s entire share capital, it might not pass regulatory scrutiny.
A lot has changed since 2015, and regulators need to reconsider their previous stance on telecom consolidation.
Alarmingly, Telkom’s market value continues to shrink.
In 2007, the company’s market capitalisation was R88bn. A year later — after selling its stake in Vodacom — it dropped to R68.3bn.
In the past 15 years, Telkom’s value has fallen by a whopping R68bn. It has shrunk further to R20bn this week vs R41bn as of March 31 2015.
Blocking the MTN-Telkom deal over regulatory concerns no longer makes sense and would leave SA poorer.
— Gugu Lourie, founder and editor of TechFinancials
Telkom is now a shadow of itself.
As a stand-alone entity, it would be unable to aggressively compete against Vodacom, which has a market value of R255bn vs MTN’s R265bn.
Given Telkom’s fast-declining value, the proposed tie-up makes sense for the industry and consumers.
The Competition Commission must do the right thing and allow MTN to acquire Telkom.
If not, Telkom will follow the likes of struggling Cell C, which has morphed into a “super” mobile virtual network operator.
Mega-mergers
The next phase of the telecom sector development will require operators with ample resources to invest in 5G and other new technologies. Shrinking telcos like Telkom and Cell C would not have the capacity to raise enough capital to compete against MTN, Vodacom and Rain.
Furthermore, global consolidation in the telecom space is happening worldwide. The USA, Kenya and Brazil only have three major operators in their countries.
Nick Reed, the boss of Vodafone — Vodacom’s parent company — supports the drive for mega-mergers.
Reed has been lobbying European regulators for sensible mergers and collaboration deals to help improve returns and encourage wide-scale investment in 5G and fibre.
Considering Reed’s position, Vodacom appears highly unlikely to oppose the proposed MTN-Telkom deal.
Nevertheless, Vodacom could raise concerns about the spectrum to be consolidated in MTN.
One hopes MTN has a plan to deal with this potentially sticky issue.
In another development, rival Vodacom is gearing up to acquire up to a 40% stake in a new infrastructure business consisting of Vumatel and Dark Fibre Africa’s (DFA) fibre assets. The new infrastructure business is owned by Community Investment Ventures Holdings (CIVH), a Remgro-controlled company.
Vodacom is spearheading network infrastructure consolidation.
Clearly, Vodacom and MTN are making a big push for fibre rollout in SA.
Blocking the MTN-Telkom deal over regulatory concerns no longer makes sense and would leave SA poorer.
Such an ill-advised move would also affect the rollout of fibre across the country, which enables a seamless rollout of 5G technologies.
Alternatively, SA’s end users stand to benefit from an MTN-Telkom deal and a new infrastructure company created by Vodacom, DFA and Vumatel.
Both entities will be well-resourced financially to roll out the necessary fibre.
A new wave of industry consolidation
The proposed MTN-Telkom deal may herald a new wave of industry consolidation in SA and the rest of the continent.
Ralph Mupita, the CEO of MTN Group, recently hinted that Africa would witness a new wave of super telcos with the capacity and capabilities to source funding to sustain growth.
“Having a market that is saturated by a number of players is not sustainable. There is simply not a big enough profit pool to meet the return and other financial objectives of a number of industry players,” Mupita told Bruce Whitfield during a webinar titled Think Big.
“Within the next few years, we will see a sector dominated by two to three players who have the capabilities and capacity to rally huge amounts of capital investment locally and abroad, to sustain the industry’s expansion. MTN has every intention of being one of the scale operators in all its markets.”
The push by Mupita for consolidation appears to be starting in MTN’s home market of SA.
MTN will likely in the future eye significant markets outside SA to facilitate consolidation.
Despite public pronouncements to the contrary, Vodacom will likely make a move to acquire Vodafone Ghana assets.
MTN, Vodacom, Orange and Airtel Africa are obvious front-runners in the new wave of telco consolidations in Africa.
SA’s regulatory bodies should show leadership to the rest of Africa by allowing the creation of super-African telcos that will compete with rivals from Asia, Europe and the US.
“Even zealous regulators agree that there is no ‘magic number’ that guarantees healthy competition in a market,” advisory firm Strand Consult recently argued.
“Further, blocking mergers risks promoting static efficiency (prices) over dynamic efficiency (investment in product innovation and quality improvements) effect.”
• Gugu Lourie is the founder and editor of TechFinancials.
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