Merging company

What’s next in the MTN, Telkom and Rain saga?

On October 19, Telkom announced that MTN had withdrawn from acquisition talks in which the two mobile network operators had been involved since mid-July. MTN has also confirmed its withdrawal from negotiations.

According to Telkom, MTN ended talks because Telkom could not provide exclusivity to MTN after Telkom received a merger proposal from another South African mobile network operator, Rain, in late September.

MTN’s departure signals the end of what has been a dramatic love triangle between the three network operators, but now the question becomes, what happens next?

The MTN and Telkom deal, if successful, would have seen the merger of South Africa’s second and third largest operators, essentially creating a duopoly in the South African telecommunications industry of MTN and Vodacom, which counts more than 45 million subscribers, MTN 34 million and Telkom 15 million.

The acquisition would also have given MTN a chance to catch up with Vodacom in the race for fiber dominance. Thanks to Openserve, the fiber subsidiary of Telkom which is also the first fiber network operator (FNO) in South Africa, MTN would have had a response to Vodacom’s majority stake in FNO Vumatel, second in South Africa.

After the failed talks on MTN and Telkom, here are several possible scenarios of what will happen.

MTN and Telkom restart talks

According to MyBroadband, citing an unnamed source familiar with the MTN/Telkom negotiations, the reason MTN pulled out of the talks was not that Telkom could not guarantee exclusivity but because MTN did not want Telkom to negotiate with d other parts at the same time.

The source says MTN asked Telkom to look at the various deals on the table in whatever order it preferred, as long as it wasn’t during their negotiations. After Rain submitted his merger proposal to Telkom, MTN asked how long it would take to review Rain’s proposal, a question to which Telkom could not provide a firm answer.

If the Rain and Telkom talks fail and Telkom, it would seem logical that MTN would be ready to return to the negotiating table as they have a lot to gain from a successful acquisition of Telkom.

Rain and Telkom reach an agreement

When Rain announced his intention to submit a merger proposal to Telkom in August, CEO Brandon Leigh said the merger would create a strong third player to compete with Vodacom and MTN.

A Rain/Telkom merger would likely encounter fewer regulatory hurdles than an MTN/Telkom merger, as it has more pro-competitive elements, although the state of Telkom’s books may call into question its ability to finance the Rain merger proposal.

Telkom is also reportedly considering the proposal to accelerate its own 5G rollout, an area in which it has lagged. A merger would allow Telkom to combine Openserve’s fiber network and Rain’s 5G expertise to accelerate the nationwide rollout of 5G.

This scenario, on the other hand, would benefit Rain in at least two ways. First, it would now be able to compete with the larger MNOs of MTN and Vodacom by drawing on Telkom’s subscriber base as well as its broadband and fiber assets.

Second, Rain’s current valuation of R17.9 billion, which is higher than Telkom’s market capitalization of R17.5 billion, would see Rain’s shareholders mock the bank for selling at a valuation of 7 .5% higher than a year ago.

Even if they decide not to sell, Rain shareholders would still benefit from owning shares in a larger telecommunications company, which would unlock a lot of value, especially on the valuable 5G front after Rain’s acquisition. .

Telkom is acquired by another entity

Since starting its flirtations with MTN and Rain, the company has also received an acquisition offer from Toto Consortium, a South African investment firm that made a $433 million (~$7 billion) bid. rand) to buy the government’s 40.5% stake in the mobile network operator. .

At the time, South Africa’s communications minister, Khumbudzo Ntshavheni, said the government had no plans to sell its stake in Telkom and that in the event of a change in position, it would communicate.

However, with the administration of President Cyril Ramaphosa having a positive attitude towards the privatization of state assets and stakes, it is not an exaggeration to think that the government could decide to put its stake in Telkom in sale if a valid offer arises.

With Telkom’s share price steadily declining since MTN’s breakup and its valuation plummeting, if another entity came with a premium bid for the government’s stake, its chances of success would not be zero.

Telkom’s share price movement since MTN talks collapsed on Oct. 19 (Image source: MoneyWeb/HigherCharts)

What the possibilities mean for SA telco

Regardless of what happens in the tangle of MTN, Telkom and Rain, it will have an impact on the telecommunications industry in South Africa.

A no-deal between MTN and Telkom will put a smile on Vodacom’s face as it would mean less competition on the 5G and fiber fronts and it would also retain its title as ‘the number one mobile operator in South Africa’.

For Rain, that would mean a much clearer, barrier-free path to a merger deal with Telkom and also less competition on the mobile network operator front.

However, if MTN and Telkom restart talks and strike a deal, it would mean that the decades-old tussle between MTN and Vodacom would become even more heated as they would compete in the mobile network operator space as well as in both technologies driving the future of communications, 5G and fiber.

A successful deal between Rain and Telkom would theoretically present a remedy to the current duopoly of MTN and Vodacom, potentially opening up the telecommunications playing field in South Africa for the benefit of consumers.

A non-deal between the two, on the other hand, would make either a deal to acquire MTN/Telkom or a government equity stake in Telkom by another entity much more likely, opening up many other possibilities for the competitive health of the telecommunications landscape in South Africa. .

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