Why Rain needs Telkom merger
TRANSACTION: BID HIGHLIGHTS POTENTIAL SAVINGS
Deal will create a formidable third player in the market.
It’s certainly a stretch by Rain to call any potential transaction with Telkom a “merger”. Sure, each is worth around R22 billion – on paper, at least. But we already know that Telkom itself believes it is trading at a “significant discount” to the R50 billion-plus sum-of-its-parts. Former CEO Sipho Maseko argued this two years ago.
Surely, in any prospective merger discussions, the Telkom board will make a strong case that it is valued far higher than it currently is on the JSE?
While Rain describes its approach as “a formal request to present the Telkom board with a proposal”, there has been no formal engagement between the parties.
This was confirmed in a Sens statement by Telkom on Friday.
The Takeover Regulation Panel issued a stern rebuke to Rain on Thursday, describing its announcement as “unlawful” and instructing it to withdraw it.
Rain Ebitda indicator
Rain can cite its strong growth – it is a “disruptive start-up” – but this remains a business that has only just crossed the R1 billion annual earnings before interest, tax, depreciation, and amortisation (Ebitda) mark, in the year to February.
The Telkom group had Ebitda of R12 billion last year. Its mobile unit reported Ebitda of R5.8 billion.
This is simply a far larger business than Rain, despite the latter’s assertion in its merger “proposal” that the “combined data traffic of rain’s retail customers is now equivalent to that of Vodacom, MTN and Telkom”.
Rain’s argument is that it plus Telkom would create a formidable third player in the market to challenge the Vodacom/MTN “duopoly”.
Its proposal states plainly that: “The potential benefits of a Telkom and rain [sic] merger are numerous. The number of combined rain and Telkom sites will be equivalent to that of Vodacom and MTN and the avoidance of duplication would result in material capital and operational cost savings.”
Any existing player in a market who wants to merge with another will highlight the potential savings. However, beyond this standard merger fare, there are two underlying reasons why Rain sees benefits in a combined entity.
The 5G future
It sells its lead in 5G hard. It says its network of over 1 500 5G base stations covers in excess of six million homes.
It also says: “In 5G the opportunity would exist to leverage the fibre network of Openserve and rain’s 5G expertise to accelerate the rollout of 5G nationwide and further grow homes passed.”
What Rain is saying is that it needs access to Openserve’s fibre network, which is the largest in the country by some margin.
Without this, Rain has to trench its own fibre or pay for links between its towers, and 5G needs a lot of towers. Rain doesn’t only need the dense metro fibre coverage, it also needs long-distance links to haul traffic across its network.
Rain doesn’t really have the balance sheet to build a national fibre network and it’s doubtful that its shareholders are going to be happy to spend tens of billions building even a modest one.
A deal with Telkom neatly solves this capex/opex problem, which is only going to grow bigger as its network scales.
Mobile at scale
Rain also points to a merged entity being able “to build on Telkom Mobile’s success in 4G and, in future, in 5G”.
In its announcement, just before this, it deftly slips in this line: “In the recent spectrum auction, rain acquired additional spectrum that signalled its intention to enter the mobile market.”
So, Rain has far bigger ambitions in the mobile market. It would’ve had these all along, but because it bought the old iBurst (WBS) spectrum, it simply hasn’t been able to launch a more complete suite of mobile services.
It is effectively competing as an alternative to ADSL, fibre, and mobile data (hotspot router-type) offerings.