- Telkom is currently in talks about a possible takeover deal by MTN – but now data-only network provider Rain has entered the fray.
- Rain wants to merge with Telkom, and it believes it will create a strong third player to compete with MTN and Vodacom.
- Rain says the merger could leverage the fibre network of Telkom’s Openserve and its own 5G expertise to accelerate the rollout of 5G nationwide.
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Data-only network provider Rain wants to merge with Telkom, which is currently a takeover target of MTN.
Rains says the merger will create a “5G powerhouse”, a strong third player to compete against a “telecommunication duopoly” in South Africa.
In an announcement on Thursday, Rain said it made a formal request to present the Telkom board with a proposal that would ultimately result in the merger of the two companies.
The valuation for the merger still needs to be decided.
Rain reached breakeven point last year, and is on track to report earnings before interest, taxes, depreciation and amortisation (Ebitda) of more than R1 billion for the year. By comparison, Telkom’s Ebitda was almost close to R12 billion in the year to March.
Telkom has interest-bearing debt of more than R8 billion.
Brandon Leigh, CEO of Rain, believes that if the two companies merge, they will create a cost-efficient operation that would turn Telkom’s cash-flow situation around. Telkom generated negative free cash flow of R2.1 billion in 2021.
Leigh said Rain has little debt and sufficient facilities to fund its growth.
“As a standalone company, Rain has adequate funding for its rollout and growth, and we assume Telkom has the same. However, significant savings in capex [capital expenditure] and opex [operating expenses] from the combined network will be cash generative,” he said.
Rain said the companies would still need to agree on the terms of the proposed merger but reckons that its growth in the last six years will bring substantial weight to the merged entity.
Last month, MTN and Telkom announced that they were in early negotiations about a deal that would see MTN buy Telkom in return for shares or a combination of cash and shares.
Patrice Motsepe’s African Rainbow Capital (ARC), which owns more than 20% of Rain, valued that business at roughly R15 billion, while Telkom’s market capitalisation is almost R23 billion.
Rain’s other major shareholders include investment vehicles owned by former FNB CEO Michael Jordaan, Rand Merchant Bank co-founder and CEO of FirstRand Paul Harris, and former OUTsurance CEO Willem Roos.
The six-year-old business is focused on building 4G and 5G data networks. The company now has more than 7 500 4G and 500 5G base stations.
The number of combined Rain and Telkom sites will be equivalent to that of Vodacom and MTN, which would avoid duplication and would result in “material” capital and operational cost savings, Rain says.
Rain’s 5G network covers more than six million homes, and it also supplies data to Vodacom and earns roaming income from that agreement.
On Thursday, Rain said that its roaming agreements with Vodacom will remain in place even if it merged with Telkom because they are long-term in nature.
“In fact, as a merged entity, we will be able to improve the services we offer Vodacom,” said Leigh.
Like other telecommunication firms, the company saw strong subscriber growth during the pandemic – but this was accompanied by widespread complaints about poor reception and client assistance.
“We had explosive growth in customers but also significant teething problems with customer service as our call centre was overwhelmed,” Leigh acknowledged on Thursday.
Rain believes a merger with Telkom will bring “numerous” benefits.
“In 5G, the opportunity would exist to leverage the fibre network of [Telkom’s fibre network company] Openserve and Rain’s 5G expertise to accelerate the rollout of 5G nationwide and further grow homes passed. 5G to the home is a very attractive alternative to ADSL, 4G and fibre, and can provide Telkom and Openserve’s existing home customers with a plug and play solution as well as attracting new customers as the home broadband market continues to grow.”
Rain also wants to enter the mobile market. Telkom already has more than 17 million active mobile subscribers.
“In combining their resources, a merged entity would be able to build on Telkom Mobile’s success in 4G and, in future, in 5G which is expected to feed consumer demand for faster connectivity driven by streaming, gaming and virtual reality.
“[The merger] is a logical alternative to simply selling to MTN and would also be consistent with the pro-competitive policies of government,” said Rain. Government owns 40% of Telkom.
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