Rain founder Paul Harris opens up about plans with Telkom

Rain surprised the market on Thursday when it announced that it had formally requested to present a merger proposal to the Telkom board.

Rain said merging with Telkom would create a strong third player with a great 5G network to compete against Vodacom and MTN.

The operator focussed on the pro-competition nature of its proposal, calling it “a logical alternative to selling Telkom to MTN”.

“The merger would bring together the considerable infrastructure and mobile businesses of Telkom and the successful new age 4G and 5G businesses of Rain,” it said.

Rain highlighted that it has over 7,500 4G base stations and over 1,500 5G base stations that cover over 6 million homes.

The benefits of a merger between Telkom and Rain include creating an extensive mobile network and saving on capital expenditure by avoiding duplication.

Rain used a coordinated media strategy to announce the merger proposal, which was very effective. It was the big news of the day.

However, it also landed Rain in hot water with the Takeover Regulation Panel (TRP), who said the operator did not get prior approval as required by the Companies Regulations.

Despite the hiccup, it got Telkom’s attention. “If an offer or formal proposal is received from Rain, the board of Telkom will consider it in accordance with its legal obligations,” it said.

History repeating itself

Paul Harris is one of Rain’s founders and, under the firm Quarme Private Equity Investments, is the largest shareholder in the company.

Harris’ discussion with Biznews founder Alec Hogg about their merger proposal highlighted that it is a repeat of what Harris and his partners achieved in the finance world.

Harris, Laurie Dippenaar, and GT Ferreira merged their lending and financing business, Rand Consolidated Investments (RCI), with Johann Rupert’s Rand Merchant Bank (RMB).

They swapped the name RCI for RMB, and diversified into insurance in 1992 by acquiring Momentum. They also helped build Discovery from scratch.

The big deal came in 1998 when the relatively small RMB acquired Anglo American’s stakes in FNB and Southern Life.

They established FirstRand Limited by merging the FNB and Southern Life with RMB and Momentum.

Ferreira said the deal was like “the proverbial sardine swallowing a whale. We were a bit worried. We were a small organisation.”

The merger was exceptionally successful, and today, FirstRand is the largest listed financial services group in Africa.

The proposed merger between Rain and Telkom resembles the creation of FirstRand, with a small player merging with a large company to create a new telecommunications powerhouse.

Harris opens up about plans

Harris admitted that he is experiencing déjà vu with the proposed Rain and Telkom merger, which has “huge similarities” with the FirstRand deal.

“There are many lessons we have learned with the FirstRand merger which we can use now,’ he said.

Harris described Telkom as a supertanker with excellent assets, while Rain can be seen as a speedboat which can manoeuvre easily and do things fast.

“Telkom does not have the gross potential of Rain and is hampered by legacy, including 2G and 3G networks, business processes, and distribution channels,” he said.

A merger would influence the current Telkom culture to unlock the potential of its staff and management.

Creating a new powerhouse and influencing an entrenched culture is not easy.

However, Harris can draw on the experience of top business leaders involved in Rain, including former FNB CEO Michael Jordaan and Outsurance founder Willem Roos.

He added that a merger would be good for consumers. “You should ask consumers. Would they like a duopoly [Vodacom and MTN] or three players going at each other,” he said.

He added that there is the risk that MTN will become more dominant and stifle competition if they acquire Telkom’s assets.

Uncertain whether any deal will be done

Many commentators are pitting the Rain merger against MTN’s discussion to buy Telkom as the two options the Telkom board must consider.

Harris pointed out that Telkom’s board has four options:

1. Following their current strategy and continuing operating as usual (the most likely option).

• Supporting MTN’s plan to buy Telkom.

• Support Rain’s proposal to merge with Telkom.

• Back Toto Consortium’s bid to buy the government’s 40.5% stake in Telkom.

“The Telkom board has to consider all these options and make the best decision in the interest of all stakeholders,” Harris said.

He added that Telkom’s stakeholders include its shareholders, its employees, and ordinary South Africans.

Apart from the board’s approval for any deal, many regulatory hurdles are associated with MTN and Rain’s plans with Telkom.

MTN and Telkom are the second and third largest telecoms operators in South Africa, and a merger between the companies will face severe Competition Commission scrutiny.

There are also concerns about the concentration of ownership in the mobile telecoms industry and the consolidation of spectrum, which apply to both MTN and Rain’s proposed deals.

Harris said their main advantage is their great spectrum portfolio. If Rain’s spectrum cannot be consolidated with Telkom’s, a merger between the operators looks far less attractive.

What happens next

Harris said the next step is for Rain to follow the Takeover Regulation Panel’s guidance to comply with the Companies Regulations.

Following that announcement, Rain should reach a position where it can analyse the deal, propose it to the Telkom board, engage with them, and receive additional information.

Harris hopes that following these steps, they will get to a point where they can provide an updated proposal, potentially leading to a binding proposal of a merger between Rain and Telkom.

He added that they have not engaged with the government, which owns 40.5% of Telkom.

“In terms of the takeover regulations, you don’t engage with the shareholders. We have not engaged with the shareholders,” Harris said.

He added that they would not spend time lobbying for influence to try to make the deal happen.

“Our view is that the business case prevails. We put on the table what the business case is and why it is good for the stakeholders,” he said.