Will Telkom’s R2.7bn BCX bid make the grade?

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Cape Town - The latest telecoms merger in South Africa may be worth billions of rand, but it is not causing any significant excitement – perhaps because there is no bidding war yet.

Boring as it sounds, Africa’s largest fixed-line telephone group Telkom [JSE:TKG] is set to pay R2.7bn for fast-growing technology group Business Connexion [JSE:BCX] (BCX).

Sadly on June 12, Telkom and BXC announced that they had agreed to suspend talks following the death of BCX CEO Benjamin Mophatlane. As a result, the Takeover Regulation Panel granted an extension for the posting of the circular relating to the transaction until July 11.

BCX is on an African foray – the technology firm is snapping up assets across the continent. As part of its growth plan, BCX last Tuesday bought a 30% stake in Nigeria’s IT solutions provider to the financial services sector in Lagos.

This ferocious appetite for deals in Africa makes it likely that BCX’s deal with Telkom could trigger counterbids. Owing to its successful ventures into Africa, BCX is a good proposition for any conglomerate looking to do business on the continent.

BCX provides a ready-baked Africa strategy

Quick off the mark, Telkom has enticed BCX shareholders with 20% premium over the share price at close of trade on April 14 – the day the company issued a cautionary notice valuing the deal at R2.7bn. Today, the market value of BCX is sitting at more than R2.5bn.

At face value that’s really a good offer, but will this premium fend off potential counterbids?

Given it succeeds I think BCX, one of the largest ICT firms in Africa, can attract more bidders who might be ready to offer shareholders more premium for getting an asset with a profitable Africa footprint.

BCX has operations in Botswana, Kenya, Namibia, Nigeria, Mozambique, South Africa, Tanzania and Zambia.

It is a leading IT service provider in South Africa, provides strong presence in East Africa and has an established presence in West Africa, which it continues to grow through aggressive acquisitions.

BCX is also the largest employer of ICT skills in Africa with close to 7 000 employees, who have vast experience in delivering large projects on the continent.

The 33-year-old business is also an African leader in cloud services. Through the merger of UCS and Canoa, BCX has the largest ICT support services footprint with more than 1 000 skilled engineers.

Just looking at BCX’s footprint and growth potential, the deal is likely to be rejected by shareholders due to the offer price.

We wait to see if the 20% premium offered by Telkom to BCX investors will be enough to seal the deal that could radically transform Africa’s largest fixed-telephone group.

One can’t help but think that Telkom’s offer leaves the door wide open for other potential bidders to enter the fray and spoil the party for Telkom CEO Sipho Maseko and his executive team plus bankers, who have masterfully and quietly spearheaded the deal until it was announced to the market.
 
Furthermore, BCX has a strong balance sheet, which makes the company more attractive. In the six months to end-February 2014, BCX’s total equity and liabilities stood at R3.7bn.

Maseko’s problem may be that reviving a deal scuppered two years ago by the Competition Commission could have enticed other big players with deep pockets, even private equity firms.

The Telkom boss, his executive team and their bankers appear to have placed less emphasis on strategy and focused on value only when they made their offer.

They should have done better than the 20% premium to discourage counterbids, especially considering that BCX has made serious inroads into the rest of Africa and is positioned for good growth. It has strategic partnerships with global firms Argility, IBM, Cisco, Microsoft, EMC, HP, SAP, Oracle and NorthgateArinso.

If Telkom wants to safeguard its bid – which will be financed through its internal cash resources – it needs to dig deeper into its balance sheet and set aside more cash in case it has to participate in a bidding war.

However, Telkom seems to be banking on the implementation agreement signed by both parties, which entitles it to match or better its offer if there is a superior counterbid. If the Telkom bid succeeds, BCX will be delisted on the JSE on around November 11 2014.

Market talk has it that French telecoms group Orange has been circled over BCX and is assessing whether to buy it.

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