Did Rain approach Telkom regarding a potential merger?
Maano Andy Thovhakale CA(SA)
Mining and Oil & Gas | Investment Banking | Rand Merchant Bank
Word is Rain approached Telkom regarding a potential merger.
Rain says the terms of the transaction such as valuation and structure still need to be agreed. Rain is valued at around R16.67bn while Telkom’s market cap is around R24.24bn which will give the combined entity a value north of R40bn.
This article will cover;
Rain (6 year old) is a telecommunications company with significant growth prospects. Rain’s primary product is data, and Rain is building a dedicated national LTE Advanced network and infrastructure. Rain holds spectrum licences in the 1 800 MHz band, as well as unique access in the 2 600 MHz band, which is required for 5G. It is the owner of the only 5G network in South Africa.
Rain’s income sources consist of roaming income, 4G data sales, 5G subscriptions and reseller income. Rain has rapidly grown its 4G network, supported by an infrastructure and premium roaming agreement with Vodacom. Vodacom’s roaming on the Rain 4G network is a sizable contributor to Rain’s revenue and demand for these services has been consistently strong.
Rain operates two units which are;
The global telecommunications (telecom) industry is capital intensive. Rain is well funded with sufficient capital. This makes sense considering the stature of its shareholders which includes;
Rain is EBITDA positive and generates free cash flow notwithstanding its significant capital spend. Rain exceeded R1 billion EBITDA for FY22 ending February 2022.
How did African Rainbow Capital get involved with Rain?
In 2018, African Rainbow Capital acquired 20% of Rain for R1.778bn and has made capital injections totalling R180 million. As at 30 June 2022, African Rainbow Capital’s 20.2% stake was valued at R3.372bn.
A quick condom box calculation show that Rain is value at around R16.67bn.
African Rainbow Capital's 20.2% stake in Rain valued at R3.372bn accounts for 27% of the intrinsic value of ARC’s portfolio of R14bn.
African Rainbow Capital uses the DCF method to value Rain. Using DCF, ceteris paribus, a decrease in discount rate will give a higher valuation.
Rain participated in the spectrum auction during the Opt-In round, and made a R1.15bn investment which secured it access to:
Telkom agreed to spend up R1.5-billion for two pieces of 10MHz in the 800MHz band.
Telkom came out with a statement today and said the following;
“Telkom can confirm that no offer or proposal has been received from Rain. If an offer or formal proposal is received from rain, the board of Telkom will consider it in accordance with its legal obligations.”
The global telecommunications (telecom) industry is capital intensive.
According to a PwC survey telecoms operators indicated that they could be wasting up to 20% or $65 billion a year in capex.
Are there any positives of operating in the telecoms space? Here are a few;
There are also some negatives such as;
What is making Telkom attractive to many?
Telkom’s Openserve currently connects +-400 000 homes to its fibre network,
Telkom's fiber infrastructure, data centres and business operations seem to have caught the eyes of many.
Telkom and Voadcom's formation.
Telkom was formed when the Dept of Posts and Telcoms was divided into 3 separate entities (Dept. of P&T, Telkom and Post Office). After the split, Telkom inherited gross interest-bearing debt of R10,2bn. Telkom was wholly-owned state owned.
After the split into and commercialisation from the Dept of Posts & Telecoms, Telkom went off and started doing business.
The government thought the best way to inject skills, capabilities, new technologies, enhance global access and funding to modernize Telkom would be best achieved by bring a Strategic Equity Partner on board.
In 1997, the govt sold a 30% stake to Thintana which was a consortium of SBC and Telekom Malaysia Berhad. 30% was sold for R5.58bn, which was the biggest single inflow of capital ever into SA.
领英推荐
R4.4bn of the R5.58bn proceeds from the sale of the 30% equity stake to the Thintana was released to Telkom for the infrastructure programme to bring telecommunication services to millions of South Africans.
Telkom listed on the JSE and NYSE in 2003. The SA government was granted a golden share which entitled them to a reservation of certain rights in the control of Telkom such as (appoint specific number of directors and an entitlement to veto certain decisions).
2004, Thintana sold their 14,9% shareholding by a placement on the open market.
Thintana then sold the remaining 15,1% the to Public Investment Corporation (PIC) in November 2004.
Telkom was crucial in the formation of Vodacom.
Vodacom was incorporated in 1993 as a joint venture between Telkom (50%), Vodafone (35%) and VenFin (15%).
1993, Vodacom was awarded a mobile cellular telecoms licence in SA.
1996, Vodafone and VenFin sold a 5% stake in Vodacom Group to a BEE company, Hosken Consolidated Investments for R118m. In 2002, Hosken made a killing when it sold the 5% stake back to Vodafone and VenFin for R1.5bn.
2006, VenFin wanted out of the joint venture. Telkom didn't put up a fight. Vodafone had a clear landing strip. Vodafone bought Venfin’s 15% stake for ~R16bn.
As a result of Vodafone acquiring VenFin's 15% stake, its shareholding in Vodacom grew to 50%. In 2008, Telkom sold 15% of its Vodacom stake to Vodafone for R22.5bn and distribute the remaining 35% to its shareholders through Vodacom’s JSE listing.
15 July 2022, MTN and Telkom SA SOC announced that they have entered into discussions in relation to MTN acquiring the entire issued share capital of Telkom in return for shares or a combination of cash and shares in MTN.
Telkom Mobile already roams on the MTN network for some services.
Cell C then came out and called on regulators to assess carefully the proposed purchase by MTN of Telkom to ensure it does not reduce?competition in the infrastructure market and that smaller operators can compete.
Since the merger of these telecoms will create very big entities, someone asked;
1) how Competition Commission does its assessment, and
2) if we have a recent merger prohibited by the Commission?
1) The Commission will investigate the deal to see if it is likely to in any way (vertically or horizontally) substantially lessens or prevent competition in the market.
From a public interest perspective, the Commission will assess the impact of the transaction on employment, particular industry or sector, the ability of SMMEs controlled by HDPs to compete, the ability of national industries to compete in international markets.
If any such concerns arise, the Commission can either prohibit or approve conditionally (behavioural or structural conditions to remedy the concerns). A thorough market assessment is undertaken to determine the effect of the transaction in the relevant market….or effect on public interest.
2) Cashbuild had proposed to acquire 100% of the issued share capital of The Building Company (TBC) for R1,074,700,000.
In May 2021, the Commission recommended that the proposed transaction be prohibited.
The Building Company (TBC) is the building material division of Pepkor, with over 180 stores and sites throughout Southern Africa. Some of their well known brands are; Timbercity and BUCO Western Cape.
Why was Cashbuild interested in TBC? TBC would've enabled Cashbuild to expand geographically and incremental access to additional segments of the market.
Cashbuild Group operates branded stores as well as P&L Hardware- branded stores. The Cashbuild Group operates 318 stores in Africa (256 Cashbuild stores, 61 P&L Hardware stores, and 1 DIY store). In South Africa, the Cashbuild Group has 228 stores.
The Commission considered the activities of the merging parties and found that the proposed merger raises a horizontal as well as a vertical overlap. The horizontal overlap arises in relation to the market for the retailing of building materials, hardware and related products.
The vertical overlap arises in that The Building Company Group, through MacNeil and Cachet, is active in the wholesale supply of building material and hardware products to retailers including Cashbuild.
The Commission found that the proposed merger will result in the creation of the single largest retailer of building material, hardware and related products in South Africa. The market is highly concentrated with only four retailers that have a national footprint.
Cashbuild (acquiring firm), is the largest corporate retailer by number of stores at the national level. TBC (target firm) , is the 2nd largest corporate retailer by number of stores at the national level (including BUCO stores and other specialist/single specialty stores).
At a local level, the Commission found that the merging parties’ stores overlap in over 80 townships. In some of the affected townships, the merging parties compete mainly with independent retailers who do not exert a significant competitive constraint on the merging parties.
The proposed merger was likely to strengthen the buyer/bargaining power of the merged entity. Competitors who made submissions to the Commission complained about the buyer power that the merged entity will achieve as a direct result of the proposed merger.
Merging parties can use their buyer power to exclude their rivals from competing or growing in the townships or rural areas. Dept of Trade Industry&Competition stated that the proposed merger will result in the largest single retailer of building hardware in the country.
The approval of the transaction by the Competition authorities (a material outstanding suspensive condition) has resulted in both parties agreeing to terminate the transaction.
A lot goes into getting a deal over the line.