Counterpoint Asset Management executive director Piet Viljoen said Rain played its hand beautifully to ensure that a formidable broadband competitor was stillborn.
Viljoen was referring to an announcement this week that MTN has walked away from talks to buy Telkom.
MTN said that the discussions have terminated after extensive engagements as the parties could not agree on the process going forward.
Telkom said MTN terminated discussions as it was not in a position to provide MTN with assurances about exclusivity.
The news sent Telkom’s share price plummeting, which means its market cap is now lower than Rain’s valuation.
To understand Viljoen’s view, you have to go back to 15 July when MTN and Telkom announced that they were in the early stage of discussions about MTN acquiring Telkom.
The announcement was welcomed by investors, with Telkom’s share price jumping 30% and MTN’s stock price increasing 5%.
A merger made sense as it would have created a telecoms powerhouse with tremendous scale.
It would have combined MTN’s deep pockets and mobile market strength with Telkom’s extensive fibre, tower, and property assets.
The biggest prize for MTN was Telkom’s extensive fibre assets which are housed under Openserve.
Armed with these assets, it could have rapidly expanded its fixed- and mobile data 5G products. It could have also helped Openserve to significantly expand its fibre-to-the-home coverage.
Combining MTN and Telkom’s fibre and broadband assets would have created a broadband powerhouse in South Africa.
The entity would have been bad news for Rain. It would have faced increased competition from MTN in the 5G market and lost customers to Openserve’s fibre products.
Rain approaches Telkom
In August, Rain stunned the market when it requested to present the Telkom board with a proposal to merge the two companies.
Rain CEO Brandon Leigh said a merger would create a 5G powerhouse and a strong third player to compete with the Vodacom and MTN “telco duopoly”.
South Africa’s Takeover Regulation Panel (TRP) was quick to instruct Rain to withdraw a press statement regarding a proposed merger with Telkom.
It said Rain issued the announcement without the prior approval as required in terms of Regulation 117 of the Companies Regulations.
Rain duly complied, but it has achieved its goal. The media was awash with news about Rain’s plan and the impact on the MTN and Telkom discussions.
Many commentators laughed off the proposal as it would not come close to the value the MTN deal could bring Telkom shareholders.
However, Rain had carefully managed the media release and was aware of what was likely to follow.
The operator is backed by some of South Africa’s top business leaders, including Paul Harris, Patrice Motsepe, Michael Jordaan, and Willem Roos.
They are all experienced deal-makers and know the industry well. They could predict how Rain’s announcement would play out and what they must do to achieve their goal.
In September, Rain made an official proposal to Telkom, suggesting the acquisition of Rain by Telkom for newly issued shares.
The Telkom Board said it was evaluating Rain’s proposal.
The fact that Telkom was considering Rain’s proposal did not sit well with MTN, and three weeks later, it terminated discussions with Telkom.
The first part of Rain’s plan worked. A deal between MTN and Telkom was off the table, which prevented a huge broadband competitor from being created.
“Rain played its hand beautifully to ensure that a formidable competitor was stillborn,” Viljoen said.
“They were willing to look foolish in the short term to chalk up a significant long-term win.”
It raises the question of whether Rain is still keen for Telkom to buy it and create a 5G powerhouse.
With a valuation of R18 billion, slightly higher than Telkom’s market cap of R17.5 billion, such a deal would be wonderful for Rain shareholders.
It would allow them to either cash out on a great valuation or hold a significant share in a much bigger telecoms company.
Even if a deal is struck at a lower valuation, or not at all – which is the likely scenario – Rain benefitted from its Telkom proposal.
Harris, Jordaan, and Roos showed why they are South African business royalty. They outmanoeuvred two of their largest competitors and ensured Rain’s prospects remained positive.