Telkom surges 11% as it calls off merger talks with Rain

Shares of SA’s third-largest mobile operator Telkom leapt by double digits on Wednesday afternoon, after it said merger talks with data-only operator Rain had been called off.

The parties had determined that “a suitable transaction is not possible at this time”, Telkom said in a brief statement, with this being determined after initial discussions, but before any due diligence.

Telkom’s shares jumped as much as 11% to R35.95 on Wednesday afternoon, but they have still fallen more than 30% over the past year. Click here for more details on Telkom’s shares and other information.

Rain had maintained a merger with Telkom could create a “5G powerhouse” and also mooted other benefits, including in terms of infrastructure, while also avoiding the creation of a mobile “duopoly” in the form of Vodacom and MTN.

However, Telkom’s failure to offer MTN exclusivity during their takeover talks had resulted in MTN walking away from discussions in October, prompting Telkom’s shares to crash by almost a quarter on that news.

In July 2022, MTN had offered to buy Telkom in return for shares or a combination of cash and shares, while in September, Rain had essentially asked Telkom to buy it in exchange for new shares.

Rain said on Wednesday that both parties had “determined that the current circumstances do not align for a mutually beneficial transaction to take place at this time”.

“While the specific reasons for this decision are confidential, both parties will keep open the possibility of re-evaluating the potential transaction in the future when conditions align,” it said.

MTN declined to comment.

Makwe Masilela, who heads up Makwe Fund Managers, said the exit by Rain was likely to bring MTN back to the negotiating table. It was worth noting that MTN had only walked away from Telkom due to the lack of exclusivity in talks, had recently indicated it still saw a tie up as compelling, while Telkom had also indicated it was still open to further discussions.

“MTN needs this deal. It’s all about fibre,” he said. “Telkom is in a dominant position, with over 150 000 km of fibre, while Vodacom has teamed up with Vumatel.”

Without Telkom’s fibre assets, MTN would need to spend significantly on its own infrastructure, Masilela added.

Analyst at Nitrogen Fund Managers Willem Oldewage said there was speculation by some market participants that the announcement of Rain’s departure from talks removed the only hurdle to an offer being made by MTN for Telkom’s shares.

“We disagree and cite, among others, competition approvals, [the Independent Communications Authority of South Africa] ICASA’s spectrum allocation, coverage duplication and company integration as potential deal breakers,” he said.

The termination of the Rain proposal by Telkom is positive in terms of ensuring Telkom does not weaken their balance sheet by issuing debt or equity, said Oldewage. He added that Telkom was struggling operationally, largely due to increased costs as a result of load shedding, coupled with a declining fixed-line legacy business and little-to-no growth in its mobile unit.

A 10% rise should be taken with a “pinch of salt” as Telkom’s base cost – R32 at the start of the day – is “incredibly low,” said Oldewage. “Overall, I think the move today is a combination of speculation and relief,” he said. – news24.com