Telkom terminates discussions with Rain – but the damage is done

Telkom has terminated discussions with Rain related to a possible acquisition, but not before a potential deal with MTN was scuppered.

On Wednesday, Telkom said it had terminated discussions relating to Rain’s proposal about a potential acquisition.

It follows a formal proposal from Rain to Telkom on 30 September 2022, suggesting that Telkom buy it with newly issued shares.

“After initial discussions, but prior to any due diligence, the parties have decided that a suitable transaction is not possible at this time,” Telkom said.

Telkom added that it continues to execute its strategy to unlock value for shareholders and will provide an update on progress in this regard in due course.

The Telkom share price jumped on the news, which may point to investors hoping that a deal with MTN is on the cards again.

In October 2022, MTN walked away from talks to buy Telkom – a deal that would have created South Africa’s largest telecommunications company.

MTN terminated discussions because Telkom couldn’t assure the bigger telecom company that talks were exclusive.

Many people believed scuppering a deal between MTN and Telkom was Rain’s true goal with its proposal.

Counterpoint Asset Management executive director Piet Viljoen said Rain played its hand beautifully to ensure that a formidable broadband competitor was stillborn.

A merger between MTN and Telkom 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.

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.

Shortly after the MTN and Telkom discussions started, Rain stunned the market by requesting to present the Telkom board with a proposal to merge the two companies.

It ultimately resulted in MTN walking away from the Telkom deal, preventing a huge broadband competitor from being created.

Viljoen said Rain – backed by business heavyweights Paul Harris, Patrice Motsepe, Michael Jordaan, and Willem Roos – played its hand beautifully.

“They were willing to look foolish in the short term to chalk up a significant long-term win.”

Harris, Jordaan, and Roos outmanoeuvred two of their largest competitors and stopped the creation of a potential broadband powerhouse and formidable competitor in its tracks.