MTN acquiring Telkom is a great deal, but a tough sell

On 15 July, MTN and Telkom announced that they were in the early stage of discussions about MTN acquiring Telkom in return for shares or a combination of cash and shares in MTN.

The announcement was well-received by investors, with Telkom’s share price jumping 30% and MTN’s stock price increasing 5%.

The excitement around a deal between MTN and Telkom is warranted.

A merger between MTN South Africa and Telkom makes sense operationally, as it will create a telecoms powerhouse with tremendous scale.

It will combine MTN’s deep pockets and mobile market strength with Telkom’s extensive fibre, tower, and property assets.

A merged entity will also be well-positioned to challenge Vodacom’s dominance in South Africa and unlock shareholder value.

Rand Swiss Offshore’s Viv Govender said the market massively undervalues Telkom’s assets. “I have seen examples where the value of Telkom’s property holdings exceeds its market cap.

He added that MTN could extract tremendous value from Telkom’s fibre, property, and tower assets.

It will also give MTN a significant boost in the enterprise IT market through BCX, which offers a range of cloud, security, and ICT services.

Although a deal makes sense, not much has come of discussions between MTN and Telkom. One of the reasons is regulatory challenges.

In 2015, for example, the Competition Commission blocked a plan for MTN to take over financial and operational responsibility for the rollout and operation of Telkom’s radio access network.

The Commission said the transaction would impact the structure of the mobile market in South Africa and would “prevent or lessen” competition.

With MTN planning to acquire Telkom’s entire issued share capital, the latest deal will face far more resistance than the 2015 network outsourcing deal.

Telecommunications lawyer and regulatory expert Dominic Cull said there are two main regulatory concerns related to MTN acquiring Telkom.

1. The concentration of ownership in the mobile telecoms industry, which the Competition Commission has previously expressed concerns about.
2. The consolidation of MTN and Telkom’s spectrum is held by a merged entity, or MTN, following a successful acquisition of Telkom.

If MTN adds Telkom’s spectrum to its own, it will gain a huge advantage over its rivals like Vodacom, which will be the main sticking point for ICASA and the Competition Commission.

It raises the question of why MTN and Telkom have issued a cautionary if the deal is likely to face regulatory resistance.

Cull said the cautionary is in response to Vodacom’s plan to buy a stake in CIVH, which owns Vumatel and DFA.

Vodacom will combine its fibre assets with Vumatel and DFA to form a new fibre powerhouse, dubbed FibreCo, which competes directly against Telkom.

How a deal can be structured

Cull said it is unlikely that MTN is planning to buy Telkom without structuring the deal to spin off certain units to make it easier to pass regulatory muster.

He said it is likely that MTN wants to get access to Telkom’s extensive fibre assets.

MTN is a strong mobile player and has already started to roll out 5G, offering fixed-broadband and mobile data products over this network.

MTN’s 5G rollout requires more fibre, including links to all towers and an extensive backhaul network. Openserve’s extensive fibre network is a perfect foundation to build from.

“MTN is also not very good at managing its fibre assets. These assets can be placed under a merged entity with Telkom and Openserve — who know what they are doing,” Cull said.

Cull expects the transaction between MTN and Telkom to focus on the operators’ fibre assets, similar to the Vodacom/CIVH deal.

“The moment that we start talking about merging MTN and Telkom’s mobile units and spectrum, we run into regulatory red flags,” he said.

Political will behind the deal

The South African government owns 40.5% of Telkom, while the Public Investment Corporation (PIC), which is closely linked to the government, owns 14.8%.

The government can make or break a deal between MTN and Telkom, which raises questions about the political will behind the discussions.

The ANC government is likely to face opposition from its alliance partners — the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP).

The National Union of Metal Workers of South Africa (Numsa) has rejected MTN’s planned acquisition of Telkom.

Numsa general secretary Irvin Jim said they condemn any plan to privatise Telkom.

“We are opposed to any privatisation of state-owned companies. We have consistently warned about the dangers of privatisation and the dire impact this would have on the working class and the economy,” Jim said.

Despite a potential backlash from unions, industry commentators said the government must have shown some support for the deal for Telkom and MTN to announce it on SENS.

There has been no comment from the communications minister, but Cull said the government must have, at least, given a provisional green light on the deal.

“If MTN buys Telkom, the government will divest itself from the last truly valuable asset in the telecommunications sector,” Cull said.

“On the other side, a deal will raise a lot of revenue for the National Treasury, which is sorely needed in the short term.”

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This article first appeared on Daily Investor and is republished with permission.

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