WHY MTN WALKED
Insiders say intense mistrust between negotiators killed potential landmark deal with Telkom
A deal that would have created the largest mobile network operator in the country was scuppered by deep mistrust between negotiators from MTN and Telkom.
According to well-placed insiders, Telkom executives feared competition authorities would prohibit the deal from the start. They also suspected that MTN was interested only in their lucrative fibre business, Openserve, even though its proposal was for the entire group. But MTN insiders have denied this.
MTN, on the other hand, grew deeply suspicious when Rain entered the fray and pushed Telkom to commit to a timeline for the evaluation of a bid from Rain before MTN could place a concrete offer on the table.
This week both companies, which have been in discussions since July, announced that talks had been terminated. MTN said the parties “were unable to reach an agreement to their mutual satisfaction on the process going forward”.
Telkom said MTN terminated discussions because Telkom was not in a position to provide it with “assurances around exclusivity”.
Tensions between the companies became apparent on September 30 in a stock exchange announcement by MTN after Telkom informed shareholders that it had received a non-binding proposal from Rain. MTN said after the announcement it had sent a letter to Telkom and received a response “advising that [Telkom] will respond to the MTN letter more fully in due course”.
An MTN insider privy to discussions denied the company wanted exclusivity, as claimed by Telkom, saying once Rain entered the picture MTN only wanted firm reassurance so it could make a concrete offer. “Telkom was not a forthright negotiator. We were waiting and heard that Rain was talking to them and we asked [for timelines] but no-one gave us answers as to reasonable assurance on timelines.”
Another insider said the MTN and Telkom teams were at loggerheads from the beginning. “MTN did not get the co-operation of Telkom executives. The teams just didn’t work well together. They would not even agree on how they were going to go about the due diligence. MTN wanted a complete surrender from Telkom and none was forthcoming,” said the source.
But a Telkom executive told Business Times on condition of anonymity that MTN’s demand for exclusivity would have meant that Telkom had to drop the value-unlock programme it started way before MTN’s takeover proposal.
“Transactions like this [MTN buyout proposal] take long and if the competition authorities block it, this means that Telkom would have lost out on potential deals to boost some of its struggling businesses,” said the executive.
Early this year Telkom said it was looking for buyers or partnerships for its subsidiaries including BCX, the technology arm focusing on enterprise clients; Swiftnet, the mast and towers division which was scheduled to list on the JSE; and also its property division Gyro.
“There was no strong base to give exclusivity. MTN wanted a marriage certificate while the relationship was still in the early stages,” said the source.
Another Telkom insider said that from the moment MTN announced its intentions it was clear the proposed deal would not pass the scrutiny of the competition authorities and they made that clear to their suitor.
“We said you can’t merge the secondbiggest and third-biggest mobile network operators, you are just creating one big duopoly. MTN said it was workable and they could prove to us how. They never did.”
The source said two sets of advisers from both companies tried to structure a deal that would be approved by the competition authorities. The advisers agreed this was impossible.
But the MTN insider countered this, saying their plan was to argue before the competition authorities that there was consolidation in the telecom sector globally and such deals were ultimately beneficial for everyone, including consumers, shareholders and the economy.
MTN had plans to make a firm offer this month but the move was deferred to November after Rain’s proposal.
According to the MTN insider, the company’s offer for Telkom was expected to be around R60 per share. On Friday, the Telkom share price, which dropped 23% on Wednesday after the termination of the talks, closed 1.8% up at R36.
Business Times understands that some Telkom shareholders are angry at missing out on a potential big payout because of the collapse of the talks.
A successful buyout would have created the biggest mobile network operator in SA with over 52-million customers, compared with Vodacom SA’s 45-million. It would have also boasted the biggest fibre assets.
Responding to questions, Telkom said: “In line with the board’s fiduciary duties to consider all bona fide proposals, it commits management time and resources to assessing potential transactions, including in relation to financial and economic benefit and regulatory implications to arrive at the best decision for Telkom stakeholders.”
MTN said while it would not comment on market speculation, “MTN and Telkom had pre-agreed an engagement process and timeline to deal with regulatory and publicinterest remedies which would be customary in these types of transactions”.
Analysts have previously said MTN was more interested in Telkom’s Openserve business which operates an open-access fibre network. Telkom’s fibre network passes more than 840,000 homes, with about 400,000 homes connected to its fibre. Competition in the fibre space has intensified in recent years. Vodacom has merged its fibre network infrastructure with Vumatel and Dark Fibre Africa, now housed under a new company called Maziv.
MTN is lagging its rivals in South Africa in the fibre market. A deal with Telkom could
have helped accelerate its plans to become competitive. MTN SA subsidiary Supersonic has more than 60,000 fibre-to-home customers, but MTN SA aims to reach 1-million.
A source close to MTN said the company had another strategy to deepen its fibre penetration, which would be announced when it releases its quarterly results update in November.
“Over the past decade we have seen consolidation throughout the global telecom industry, given the extensive capital requirements to roll out a commercially viable telco and the benefits of scale. Telkom has an extensive fibre network that is underutilised, and the cost and time of MTN replicating a portion of this fibre network will be a cost ultimately borne by the consumer. If shareholders and management act rationally, an MTN and Telkom merger should benefit consumers,” said Mike Steere, equity research analyst at Avior Research.
David Rossouw, equity analyst at Fairtree Asset Managers, said the fibre market is said to become largely open-access, so MTN should still be able to get access to fibre to power its mobile network as well as service clients’ fibre needs.
“MTN will, however, be less defensive if the mobile market growth slows down at the expense of growth in fibre. MTN’s mobile business, therefore, does not require fibre ownership to be viable, and we could see MTN continue to pursue a more assetlite strategy, as they did with their towers.”
Rossouw said MTN “could either try for a cleaner Openserve stake, or we could see it join CIVH [Community Investment Ventures Holdings] and Vodacom in their fibre partnership if MTN believes owning fibre assets is their only future. I would not rule out MTN pursuing an asset-lite strategy with regards to fibre as well.”
Rain, which has proposed that Telkom buy it, reiterated that it believes there is a compelling business case for combining the two companies. Rain said together with Telkom the companies continue to evaluate the non-binding proposal it has put on the table. It refused to comment further.
The high-speed network operator, partly owned by businessman and former chair of First Rand Paul Harris and Patrice Motsepe’s African Rainbow Capital, wants to create a “formidable third major player to compete with what is effectively a duopoly in South Africa”.
Analysts do not expect a Rain and Telkom tie-up to succeed. Rossouw said “it will be tough to get Telkom shareholders over the line if such a deal requires a big equity raise”.
Steere said Telkom was attractive to Rain given its mobile subscriber base and infrastructure assets, but he doubts Telkom shareholders will agree to the Rain proposal. “Consolidation should enrich scale. However, Telkom is debt-heavy and cashstrapped. Given that African Rainbow Capital last valued its 20% stake in Rain at R3.4bn, valuing Rain at a hefty R16.6bn [Telkom market cap: R17.7bn], we believe Telkom is unlikely to accept a Rain proposal,” he said.