Analysis | Rain muddies the waters with approach to Telkom

“Broadband player rains on MTN’s parade.”

“Rain clouds picture for telecoms M&A.”

“Rain muddies the waters.”

Rain’s left-field approach to Telkom’s board about a possible merger is going to provide endless entertainment to headline-writing subeditors in South Africa’s newsrooms.

The executives at MTN’s Fairland, Johannesburg headquarters are less likely to be amused about Rain’s move, which emerged (coincidentally?) on the same day MTN announced its group interim results, for the period ended 30 June 2022.

In what is clearly a surprising development, the data-first wireless broadband provider has moved to scupper MTN Group’s (already audacious, though preliminary) talks to buy Telkom, throwing its hat into the ring and saying it has approached the partially state-owned operator’s board of directors about a “merger”.

Ignore for a moment that Rain, although growing fast, is a relative pipsqueak next to Telkom. Does a merger make any sense? Or is this simply posturing by Rain ahead of what will undoubtedly be heated deliberations about an MTN buyout of Telkom at the Competition Commission (if it gets that far)?

Is Rain simply trying to make it (more) difficult for MTN to get its (possible) acquisition of Telkom across the line? Or perhaps it’s positioning itself to extract concessions from regulators, including the commission, well in advance.

After all, MTN and Telkom are fierce competitors. Their combination could make Rain’s life more difficult.

“No,” Rain CEO Brandon Leigh tells me. The company is “very serious” about its proposal. “We believe it is achievable.”

‘Triopoly’

Let’s have a look first at exactly what Rain is proposing.

It’s all fairly nebulous at this stage. Rain said in a statement that it has “made a formal request to present the Telkom board with a proposal which would ultimately result in the merger of the two companies”.

That’s not an offer to purchase. The “terms of such a transaction, such as valuation and structure, would still need to be agreed”.

“Our proposal is pro-competitive, pro-consumer and will create a more competitive ‘triopoly’ rather than creating an entrenched duopoly,” Leigh told me.

In its statement, Rain said there is a “compelling” case in to combine the businesses. “Some consolidation in the industry is both desirable and inevitable as it leads to better utilisation of infrastructure. It should not, however, be at the expense of competition, which promotes greater access for consumers to data at more affordable prices,” it said pointedly.

“The proposed merged entity would create a formidable third major player to compete with what is effectively a duopoly in South Africa. Telkom has in recent years worked to transform its business, and a combination of Telkom and Rain would enable it to continue to meet these objectives while accelerating its growth. It is a logical alternative to simply selling to MTN and would also be consistent with the pro-competitive policies of government.”

This is all likely to be music to the ears of trade, industry & competition minister Ebrahim Patel and his enforcers at the Competition Commission, who have taken a dim view – rightly or wrongly – of concentration in the mobile market. The commission is likely to look more favourably on a merger of relative minnows (Telkom and Rain) than on the number-two player and a member of the “duopoly” (MTN) swallowing the number-three player.

So, yes, Rain could really end up – cough – raining on MTN’s parade when it comes to regulatory hearings about a tie-up.

Rain describes itself as a “disruptive start-up [that has become] an established and fast-growing company with little debt and sufficient facilities to fund its growth”. “In line with the original projections, it is reaching critical mass and achieved Ebitda of over R1-billion in the year to 2022,” it said.

But no matter how much Rain fluffs out its tail feathers, there’s no argument that it is still small next to Telkom. It has no fibre infrastructure, whereas Telkom has more than 160 000km nationally; and it offers no fibre-to-the-home services either, whereas Telkom is in a race with Remgro’s CIVH for market leadership. Telkom also has a bigger portfolio of towers and owns an enterprise IT services company (BCX), among other assets.

Politics

Given government holds a 40.5% direct stake in Telkom, any deal is going to require political support. MTN may have already secured that, through lobbying by its politically connected chairman, Mcebisi Jonas, by selling an MTN/Telkom combination as creating a black-led African telecoms champion in which government remains a significant minority shareholder.

Would Rain be able to garner political support for its proposal? Patel and the Competition Commission may favour it for competition reasons. Will that be enough?

“As we read it, it is unlikely that government will have a significant stake in MTN Group after they have absorbed Telkom,” Leigh tells me. “We are proposing a merger and the structure has not been addressed as yet. We will not address relative values until we prove the business case, which believe is very compelling.

“Bear in mind that Rain is just six years old in a massive market, and has just achieved critical mass – so, future growth will be at better margins. We are at different points of the value curve and have great operational leverage. 5G will accelerate growth and we positioned for it.”

There’s certainly never a dull moment in South Africa’s ICT industry. Maybe, just maybe, in a year’s time those subeditors will be writing headlines about a certain upstart succeeding in washing a competitor’s bid away.  — (c) 2022 NewsCentral Media

• Duncan McLeod is editor of TechCentral

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