Telkom CEO Serame Taukobong revealed that discussions with Rain broke down because of different views on the two operators’ valuations.
On 11 August 2022, Rain formally requested to present a merger proposal to the Telkom board to create a new telecommunications player with their combined assets.
Rain approached Telkom on 30 September 2022, suggesting that Telkom buy it with newly issued shares, creating a strong competitor to Vodacom and MTN.
“The proposed merged entity would create a formidable third major player to compete with what is effectively a duopoly in South Africa,” Rain said.
However, in January 2023, Telkom said it had terminated discussions relating to Rain’s proposal about a potential acquisition.
“After initial discussions, but before any due diligence, the parties have decided that a suitable transaction is not possible at this time,” Telkom said.
Taukobong has now revealed that the discussions broke down because their valuations differed vastly from what Rain proposed.
He said they are focused on providing shareholder value, which makes valuations critical to a constructive deal.
“If we have overpaid for Rain or undervalued Telkom, our shareholders would not have been very happy with that,” he said.
Rain CEO Brandon Leigh confirmed that one of the reasons discussions were terminated was “the inability to reach an agreement on valuations of both parties”.
Rain and Telkom’s valuations
Rain is on the rise, with strong subscriber growth and rapidly increasing EBITDA (earnings before interest, taxes, depreciation, and amortisation).
The mobile operator’s management team is confident in their business plan and ability to execute it, expecting hockey-stick growth.
African Rainbow Capital Investments’ (ARCI) interim financial results for the six months ended 31 December 2022 revealed that it kept Rain’s valuation stable at R17.93 billion.
ARCI has recorded significant gains from Rain’s fair value adjustments over the years, which made it a hotly debated topic among investors.
Telkom, in comparison to Rain, is struggling. The group’s revenue remained flat at R43.14 billion, and net income fell by 84.7% – from R2.6 billion in 2022 to R346 million in 2023.
It also realised a significant impairment loss on two cash-generating units, Openserve and Telkom Consumer.
The total impairment loss amounted to R13 billion, which brings the company’s net loss for the year to R9.97 billion.
Its share price was hammered over the last year, which saw Telkom’s market cap drop below R15 billion.
This means that Rain’s valuation is higher than Telkom’s market cap.
However, Taukobong said the company is worth over R60 per share, and any suitors should see that as a benchmark before making an offer.
Telkom’s board and management’s view is thus that Telkom is worth more than R30 billion, over double its current market cap.
It is, therefore, not surprising that valuations were the main reason discussions between Telkom and Rain broke down.