Now that the MTN deal to buy Telkom is off the table, speculation about the next big move has set the telecoms market guessing. Among the suggestions is that Telkom is now free to enter a share swap deal with Rain.
Such a deal would see Telkom purchasing SA’s only data network operator. However, one has to look at the devil in the detail of such a move to ascertain its plausibility.
Telkom’s balance sheet is insufficient for a transaction valued at more than its market capitalisation of R17.6bn. Rain’s market value is R17.9bn, which puts a damper on the share swap suggestions.
Don’t get it twisted. I am pro-competition. I like the banking industry, which has six competitive players in Capitec, FNB, Absa, Nedbank, Standard Bank and Investec, plus fintech players. But let’s not kid ourselves.
The telecoms sector is more about the scale and deep pockets of operators that can spend billions annually on building network infrastructure. Cell C is a case study on how a “poor or not well-capitalised” telco failed to take on SA’s duopoly: Vodacom and MTN. Cell C has now morphed into a massive mobile virtual network operator (MVNO) riding on Vodacom and MTN’s networks.
In that regard, the exclusivity demand by MTN revealed the importance of the now-collapsed deal to Telkom.
The announcement to end talks by MTN was not really about walking away from such a strategic deal for its future.
As for the proposed Rain deal, I still believe it is a non-starter. How could a competitive entity plead to be bought by a competitor? A Telkom-Rain merger will find it very difficult to challenge the duopoly of Vodacom and MTN.
So, what then?
Neotel, which used to be SA’s second network telephone operator, was sold to a foreign firm. It was acquired by Cassava, a company owned by billionaire Strive Masiyiwa, and rebranded as Liquid Intelligent Technologies SA. The entity is now thriving because of the backing of a global player.
If Telkom’s buyout of Rain is a success, who will fund its growth?
Rain’s shareholder African Rainbow Capital — owned by Patrice Motsepe, Paul Harris, and Michael Jordan — will need a massive capital boost to challenge Vodacom and MTN. This might not be possible at the moment considering these three big shots are bankrolling other entities that require massive growth capital.
I think a Rain share swap with Telkom, if concluded, would be similar to what JSE-listed Blue Label Telecoms did with Cell C. Through this deal, Blue Label figured it could use Cell C to challenge Vodacom and MTN, but the plan failed dismally. Cell C continues to deliver poor results, which affects shareholder value negatively.
Perhaps the best option to challenge the duopoly is for Telkom to merge with Rain and allow a foreign buyer to snap up the new entity.
KT Corporation (formerly Korea Telecom) or British Telecom (BT) could be Telkom’s best suitors. But the big question is whether they will be keen to buy Telkom and attempt to challenge Vodacom and MTN. Besides, both entities may choose to focus on their respective markets to spend more money on deploying new infrastructure for 5G or even 6G services.
I will still advocate for Telkom to be sold to the highest bidder, even to MTN, whereas we know that a duopoly does not advance competition. A typical example is that Vodacom is not more affordable than MTN or vice versa.
Therefore, even a Telkom owned by BT will not radically reduce prices at the expense of profits to be shared by investors and reinvested in network modernisation. Such a merger would create an option for consumers similar to what is happening with our banking services, but not competition for the well-established telco duopoly.
Therefore, a merger between Telkom and Rain will not necessarily be a boon for competition and lower consumer prices. Instead, such a merger is more likely to result in higher prices for consumers.
I think Rain wants management control of Telkom, and if they manage to secure that, they will be able to sell Telkom to the highest bidder, which could be a foreign player or even MTN.
Investors punished Telkom when it announced that MTN had walked away. This implies that investors were only looking for a transaction from a bigger global operator the size of MTN, Vodacom, Orange, KT or BT. A merged Telkom-Rain could still be a takeover target for MTN and other foreign players.
I do not preclude MTN rekindling its talks to buy Telkom at a later stage.
Maybe SA deserves a telco duopoly of Vodacom and MTN to be competitive and deliver affordable prices to consumers. Our regulators could play a more prominent role in ensuring that heavy fines are implemented if Vodacom and MTN are found wanting regarding competitive pricing.
That said, whatever happens, Telkom must not be allowed to end up like the Post Office or Cell C. Telkom still has inherent value and can be disposed of for a price that benefits SA’s fiscus.
• Lourie is the founder and editor of TechFinancials.
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