There is mixed market reaction to the breakdown of merger talks between MTN and Telkom, with general consensus that the proposal had many complications, but could have been a redeeming deal for both parties.
Africa’s largest telco yesterday terminated tie-up discussions with the telephony group, after weeks of negotiations to merge.
Reacting to the news, analysts say the transaction could have accelerated Telkom’s strategy of unlocking value, while MTN could have cemented its market position in the fibre and enterprise markets.
Both MTN and Telkom informed shareholders yesterday of the withdrawal of the buyout bid because the telephony group could not provide exclusivity guarantees.
MTN, which operates in 19 markets with a subscriber base of more than 270 million, and intended to bring Telkom into its stable, initiated merger discussions in July.
“A quick observation is that deals between MTN and Telkom have been tried a few times in the past and not succeeded, and this is not really surprising, aside from the non-exclusivity requirement not being met,” says Brian Neilson, director at BMI-T.
“Perhaps the Vodacom – Community Investment Ventures Holdings (CIVH) transaction is more likely to be the pioneer of large-scale consolidation in the fibre market. Of course, there would be multiple ways in which an MTN-Telkom hook-up could have played out, and the devil would really be in the detail.”
Vodacom and CIVH are awaiting regulatory approvals for a deal that will see the telco acquire up to 40% of the ordinary shares of a newly-created, wholly-owned subsidiary of CIVH (namely Infraco), which will hold CIVH’s current interests in Vumatel and Dark Fibre Africa.
The potential of this deal, which will give birth to a large infrastructure operator, amid fierce competition in the fibre market, initially spooked the telecoms market, according to analysts.
Since November last year, when Vodacom announced the CIVH deal, there has been a scramble for Telkom assets, led by MTN, followed by data-only network Rain and Toto Investments.
Telkom’s fibre network, data centres and business operations are attractive in the increasingly competitive SA telecom sector.
The company also has a large customer base of consumer and enterprise clients across industry verticals, and a booming mobile data business, analysts say.
With MTN now out of the race, Rain is now the only suitor whose non-binding tie-up proposal is being considered by Telkom.
“The MTN proposal had many complications that required the buy in from many stakeholders, but it was also the quickest way for Telkom to accelerate its value unlock strategy,” comments Peter Takaendesa, head of equities at Mergence Investment Managers.
“The other side of the coin is that this transaction would have been the quickest way for MTN to achieve its strategic goals in the fibre and enterprise markets.
“It is quite possible that we will hear more from these two companies as the rationale for the communicated strategic goals remains valid, although it may require a different approach to get there.
“It is quite clear that the telecoms sector in South Africa will continue to move towards the themes we are seeing globally – consolidation and infrastructure sharing, etc – as the challenges to the sector are quite related across geographies over time.”
Keoikantse Marungwana, senior research manager at IDC, believes many players in the sector will capitalise on this breakup and investigate partnership opportunities with the two parties.
“We can certainly see increased focus on consolidation and partnerships in the fibre market as a growth strategy, as this market is about economies of scale.
“Many larger players have already been actively acquiring smaller players to build scale, so this failed tie-up between two massive fibre players will likely signal urgency for the small to medium players.”
Commenting on industry views and suggestions that the failure of MTN and Telkom merger talks was a missed opportunity to pioneer consolidation in the telecom sector, he says: “The market is already fairly consolidated, and smaller players have struggled to really open up the market and thrive at scale.
“This has so far not worked well for lowering South Africa's broadband affordability compared to other developing nations. Any market needs more players to fuel competition and innovation.”
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