MTN juggernaut looks at its options
Structural issues increasingly point operator to mergers
● With a share price languishing at levels last seen a decade ago, the fabled story of MTN’s meteoric rise — through its aggressive expansion in emerging-market countries that were considered no-go areas for rivals such as Vodacom — seems at a crossroads.
Should it continue to hold tight to its geographic spread across 23 nations or start seriously considering a break-up of the juggernaut as regulatory burdens in places such as Nigeria morph into deeper structural problems? The company is currently reviewing its footprint.
Grappling with its own domestic regulatory issues and falling voice revenues, Telkom is mulling a potential merger with MTN’s South African operations, a source close to Telkom said.
Early-stage and informal talks have already taken place, according to the source, who asked not to be named because of the sensitivity of the talks.
The two operators have been intermittently flirting with one another for years – they were once keen on a deal that would have seen MTN buy Telkom’s fixed-line operations.
Just three years ago, Bloomberg speculated that MTN was exploring whether it should pursue the possible acquisition of a majority stake in Telkom to challenge Vodafone-owned Vodacom.
With revenues under pressure across the sector and regulatory burdens growing, analysts and industry insiders are now convinced that consolidation in the industry is inevitable.
Business Times understands that if a deal were to happen, Telkom would be wary of MTN’s heavy exposure to the Nigerian market, which has wreaked havoc on the group’s valuation and investment case for the past three years. It favours a merger with its local operations.
Since 2015, authorities in Nigeria have demanded three separate payments worth $15.3bn (R224bn) from MTN, causing a roughly 70% slide in the operator’s share price.
MTN managed to negotiate a smaller fine for its first transgression — its failure to disconnect unregistered SIM cards — and is now on a mission to convince authorities there that it did not illegally repatriate $8.1bn in dividends or miss $2bn in tax payments.
Telkom has some exposure to Nigeria through its BCX unit, but is not keen on raising its exposure to West Africa in general, the sources said. The company preferred East and Southern Africa.
An MTN-Telkom merger would “make sense” given that the companies would be able to combine their mobile and fixed-line services, according to Alastair Jones, a UK-based analyst at New Street Research.
Operators with mainly mobile network infrastructure will struggle with the shift to high-speed 5G connectivity, which will require extensive fibre footprints to speed up network densification, Jones said.
Telkom has SA’s largest fibre network while MTN’s share of the mobile market is above 30%.
“So if regulatory authorities were to approve the transaction, then absolutely it would make sense … But from a Competition Commission perspective, I think that would be very difficult to do.”
While consolidation is certainly a theme among investment bankers, most analysts see better prospects for a Telkom and Cell C tie-up because of competition issues.
Telkom and Cell C are SA’s smallest mobile operators.
Vodacom and MTN hold three-quarters of the market in terms of subscriber numbers, with their combined share having declined only 7 percentage points in six years despite Cell C and Telkom’s efforts to gain a foothold.
Jones said a Telkom and Cell C merger was a more likely scenario as both are struggling to build scale.
Telkom has once before tried to buy the mobile operator but they were far apart on valuations. Cell C is 45% owned by Blue Label Telecoms, which is valued at just over R5bn.
Cell C’s chief legal officer, Graham Mackinnon, said last week that consolidation was highly likely.
“My prediction is that there will be far fewer telcos in five years’ time. I think consolidation is inevitable, whether that’s driven by infrastructure sharing or not.”
Operators were likely to compete on services rather than on infrastructure and spectrum assets in a few years’ time, he said.
Ashburton Investments fund manager Nick Crail agreed that consolidation is necessary, particularly since only large operators will be able to afford the heavy infrastructure investments required in the run-up to 5G.
“Ultimately, you probably don’t need more than two operators here … It really is a scale kind of game.”
In markets such as China, India and Indonesia, the investment required for data networks is already prompting talks about consolidation, despite there being only three players in each of those markets.
MTN’s precipitous share decline could make it attractive to offshore companies such as China Mobile, according to Jones. The state-owned Chinese operator has about $70bn (about R1-trillion) cash sitting on its balance sheet.
MTN is valued at about R149bn.
My prediction is there will be fewer telcos in five years’ time ... consolidation is inevitable
Graham Mackinnon Cell C’s chief legal officer