“Rain Broadband Player at the MTN parade.”
“Rain Cloud Picture for Telecom M&A”.
“Rain muddies the water.”
Rain’s left-leaning approach to the Telkom board over a possible merger will provide endless amusement to the sub-editors writing the headlines in South Africa’s newsrooms.
Executives at MTN’s Fairland, Johannesburg headquarters are less likely to be amused by Rain’s move, which comes (coincidentally?) on the same day MTN announced its group interim results for the period ending June 30, 2022.
In a distinctly surprising development, the first wireless broadband data provider has derailed MTN Group’s (already audacious, if preliminary) talks to buy Telkom by throwing its hat in the ring and saying it had approached the part-state operator. of the board of directors on the “merger”.
Ignore for a moment that Rain, while growing fast, is an equal minnow compared to Telkom. Does the merger make sense? Or is this just Rein’s posturing ahead of what will no doubt be a heated MTN Telkom takeover debate at the Competition Commission (if it gets that far)?
Or is Rain just trying to make it (more) difficult for MTN to (potentially) acquire Telkom? Or perhaps he is positioning himself to win concessions from regulators, including the commission, long before then.
After all, MTN and Telkom are fierce competitors. Their combination can make life difficult for Rein.
“No,” Rain CEO Brandon Lee tells me. The company is “very serious” about its proposal. “We think it’s achievable.”
“triopolia”
Let’s first take a look at exactly what Rain offers.
At this stage, things are pretty hazy. In a statement, Rain said it “has made a formal request to submit a proposal to the Telkom board that will ultimately result in the merger of the two companies”.
This is not an offer to purchase. “The terms of such a deal, such as valuation and structure, have yet to be agreed.”
“Our proposal is pro-competitive, pro-consumer and will create a more competitive ‘triopoly’ rather than an entrenched duopoly,” Lee told me.
In a statement, Rain said there was a “compelling” case for combining the businesses. “Some consolidation in the industry is desirable and inevitable as it leads to better utilization of infrastructure. However, this should not come at the expense of competition that promotes greater consumer access to data at more affordable prices,” the report said.
“The proposed combined entity would create a formidable third major player to compete with what is effectively a duopoly in South Africa. Telkom has been working to transform its business in recent years, and a combination of Telkom and Rain would allow it to continue to deliver on those goals while accelerating growth. This is a logical alternative to simply selling MTN and will also be in line with the government’s pro-competitive policies.”
All this is likely to be music to the ears of Trade, Industry and Competition Minister Ebrahim Patel and his staff at the Competition Commission, who have taken a dim view – rightly or wrongly – of mobile market concentration. The Commission is likely to look more favorably on the merger of relative minnows (Telkom and Rain) than on the number two player and a member of the “duopoly” (MTN) swallowing up the number three player.
So, yes, the rain can really end – cough – raining on MTN’s parade when it comes to regulatory hearings on the merger.
Rain describes itself as a “disruptive startup [that has become] an established and fast-growing company with little debt and enough cash to fund its growth.” “In line with initial projections, it is reaching critical mass and has reached over 1 billion rand in revenue by 2022,” it said.
But no matter how much Rayne ruffles his tail feathers, no one disputes that he is still small next to Telkom. It has no fiber infrastructure, while Telkom has more than 160,000 km across the country; and it also does not offer fiber-to-the-home services, while Telkom battles CIVH Remgro for market leadership. Telkom also has a larger tower portfolio and owns a corporate IT services company (BCX), among other assets.
Politics
Given that the government has a 40.5% direct stake in Telkom, any deal will require political support. MTN may have already secured this through the lobbying of its politically connected chairman Mchebisi Jonas, selling the MTN/Telkom combination as the creation of a black-led African telecoms champion in which the government remains a significant minority shareholder.
Will Rain be able to garner political support for his proposal? Patel and the Competition Commission may prefer him for competitive reasons. Will this be enough?
“The way we read it, it’s unlikely that the government will have a significant stake in MTN Group after they take over Telkom,” Lee tells me. “We are proposing a merger and the structure has not yet been decided. We won’t look at relative values until we’ve proven a business case that we think is very compelling.
“Keep in mind that Rain is only six years old in the massive market and has just reached critical mass – so future growth will come at better margins. We are at different points of the value curve and have high operating leverage. 5G will accelerate growth, and we are ready for it.”
There is certainly never a dull moment in the South African ICT industry. Maybe, just maybe, a year from now, these sub-editors will be writing headlines about some upstart who’s made it big in washing competitor’s bid. — (c) 2022 NewsCentral Media
- Duncan McLeod is an editor at TechCentral
