MTN could fix Telkom

Internet. (Duncan Alfreds, Fin24)
Internet. (Duncan Alfreds, Fin24)
IS AFRICA's biggest fixed-line operator all dolled up for a possible sale, or is it trying to attract and bring on board a strategic equity partner?

Telkom has lately been shedding weight by trimming its business while at the same time making a play for Africa’s fastest-growing technology group, Business Connexion (BCX).

Telkom has also signed a heads of agreement with MTN Group [JSE:MTN] to take over financial and operational responsibility for the roll-out and operation of its radio access network (RAN).

These developments are obviously aimed at improving Telkom’s profitability and ability to provide fully converged solutions.

In the past year Telkom’s share price has reacted positively, surging 175.2% to give it a market value of more than R24bn.

However, Telkom’s proposed tie-up with BCX could inadvertently trigger a wave of deal-making in the telecoms sector and may leave the fixed-line operator vulnerable to a takeover bid – that is, if its proposal falls through.

When Telkom’s share price was sagging, no suitors made any takeover bids for the fixed-line operator. This begs the question why.

An explanation would be that at the time fixed-line telephone assets were not fashionable; nonetheless, things have changed.

Wire line business ups sexiness factor

For example, the proposed tie-up of Vodacom [JSE:VOD] with Neotel – South Africa’s second-largest fixed-line telephone operator – has made the wire line telephone business sexier.

Telkom could yet prove a good buy for MTN, Africa’s largest mobile phone operator.

MTN, which has a cash pile of about R39.6bn, could easily make a move to buy Telkom.

The signs of a potential deal are there, and MTN is already in talks with Telkom to manage its RAN.

This might be a first step towards building momentum to take over the whole business.

While a deal in the short term doesn’t look likely, if the Vodacom-Neotel transaction gets the nod from regulatory authority Icasa things could change.

For now it might be that MTN is playing a wait-and-see game and will only show its hand after regulatory authorities make a ruling on Vodacom’s deal.

Granted, any MTN-Telkom transaction could be complex.  

Lessons from history

In that regard history is a great teacher.

In June 2012 Telkom’s top shareholder, the South African government, rejected Korea Telecom’s R3.3bn offer for a 20% strategic equity stake in Telkom.

Three years earlier, in 2009, MTN and India’s Bharti Airtel called off merger talks that could have created a $61bn telecoms conglomerate spanning Africa, Asia and the Middle East.

The government had demanded dual listing of MTN to protect the character of the local company as a South African entity.

In the event that MTN takes over Telkom, it will be able to provide the fixed-line operator with much-needed cash to fund its expansion.

Such a transaction will create a local conglomerate in which the South African government will have a big stake. It will also deal with political challenges for any advance on South Africa’s strategic fixed-line telephone asset.

This deal could be made more palatable if MTN takes a strategic equity stake in Telkom rather than going for a complete buyout.

Asked if Telkom was ready for strategic partnerships, Telkom CEO Sipho Maseko said: “Our strategy says we will do a lot of things. One of the things that is an option is to look at partnerships or acquisitions.

"That’s why we want to do the MTN deal (MTN managing Telkom's RAN). I think it’s a smart, nifty little deal. And that’s why we are also doing something with BCX.”

Yet, Maseko is nervously worried about Telkom’s scale.

 - Fin24

*Gugu Lourie is a former correspondent for Thomson Reuters, Business Report, Finweek magazine and Fin24 (writing a blog titled 'Googled'). He is the editor of techfinancials.co.za. Views expressed are his own. Follow him on #twitter @LourieGugu
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