Rain merger with Telkom – the facts


On 11 August, Rain formally requested to present a merger proposal to the Telkom board to create a new telecommunications player with their combined assets.

Rain argued that such a merger would create a strong third player to compete with Vodacom and MTN’s duopoly.

It also presented the deal as a competition-friendly alternative to MTN buying Telkom.

“The proposed merged entity would create a formidable third major player to compete with what is effectively a duopoly in South Africa,” Rain said.

Within hours of Rain’s media statement, the Takeover Regulation Panel (TRP) ordered the operator to withdraw its statement.

The TRP said Rain had acted against instructions not to make any announcement without its approval.

On 16 August, Rain withdrew its announcement, stating that it submitted a merger proposal to the Telkom board.

However, Rain achieved its goal. It got Telkom’s attention which said “if an offer or formal proposal is received from Rain, the board of Telkom will consider it per its legal obligations”.

Rain versus Telkom

Rain believes there is a compelling business case in combining the businesses, including removing infrastructure duplication, cutting capital expenditure (Capex), and creating a strong 5G player.

It added that it is well-positioned for growth, with little debt and sufficient facilities to fund its network rollout.

“We are reaching critical mass and achieved EBITDA of over R1 billion in the year to 2022,” Rain said.

Although Rain is making good progress, it has nowhere near the same scale and assets as Telkom.

Telkom’s EBITDA of R11.9 billion dwarfs that of Rain. It also has significant fibre assets, a large property and tower portfolio, and a strong IT presence in the business market through BCX.

Rain brings around 1 million subscribers, 7,500 4G base stations, and 1,500 5G base stations to the table.

Rain founder and director Paul Harris added that a merger could influence Telkom’s culture to unlock the potential of employees and management.

However, a promised culture change may be less valuable than what MTN puts on the table with its deal – cold, hard cash.

MTN has deep pockets and the capacity to make the most of Telkom’s extensive telecommunications assets – something Rain cannot compete with.

The table below shows a side-by-side comparison of the two companies and what they would offer in a merger.

Rain versus Telkom
Measure Rain Telkom
Market Cap/Valuation R16 billion R24 billion
EBITDA R1 billion R11.9 billion
Mobile Networks
Mobile customers 0.4 million* 16.9 million
Broadband Customers 0.6 million* 0.6 million
Mobile sites 9,000 7,313
Spectrum 174MHz 212MHz
Other Operations
Carrier-neutral data centres 0 10
Data centre co-location 0 2 914 racks
IT business customers 0 1,345
Productive tower portfolio 0 3,916 towers
Fibre network 0 169,000km
Homes passed with fibre 0 890,000
Fibre subscribers 0 414,847
Fibre to-the-base-station 0 20,000
Enterprise business services 0 22,000
*Estimates based on Rain projections

Regulatory hurdles

Rain is driving the idea that its deal would promote competition and is in line with the pro-competitive policies of the government.

However, the proposed merger between Rain and Telkom would face the same regulatory scrutiny as MTN buying Telkom.

The first challenge is to get approval from the Competition Commission. A merger between Rain and Telkom will lessen competition by combining the two challenger networks.

Rain and Telkom are also the largest fixed-wireless broadband providers, which can be a problem to argue away.

Assuming Rain can successfully argue a merged entity is better positioned to break Vodacom and MTN’s alleged duopoly, spectrum poses an even bigger challenge.

Regulatory expert Dominic Cull said combining the spectrum from two operators under a merged entity will be a sticking point for ICASA and the Competition Commission.

Combining Telkom and Rain’s spectrum will give them a huge advantage over its rivals – Vodacom and MTN.

To put it in perspective, Telkom and Rain have a combined 386Mhz of scarce spectrum, much more than Vodacom’s 186MHz and MTN’s 176MHz.

Two big telecommunications deals have previously been scuppered, partly linked to spectrum.

  • In 2015, the Competition Commission said a planned network management agreement between MTN and Telkom would give MTN access to additional spectrum and limit Telkom’s ability to grow and compete. It blocked the deal.
  • In 2016, Vodacom gave up on its plan to buy Neotel for R7 billion. It followed objections to the transfer of Neotel’s spectrum to Vodacom, and a moratorium on the use of Neotel’s spectrum by Vodacom for up to 2 and a half years.

A merger between Rain and Telkom would face similar obstacles as the MTN/Telkom network management agreement and Vodacom’s plan to buy Neotel.

Werksmans director Ahmore Burger-Smidt added that a merger between Rain and Telkom might also involve the change of ownership of a license, which can trigger an investigation by ICASA.