MTN, Telkom headed for merger?

Market rumours have it that MTN, Africa's biggest cellular operator, may be looking to acquire Telkom.

The speculation is an about-turn on past beliefs that Telkom may swap its 50% shareholding in Vodacom for a 100% stake in MTN.

An analyst, who asked to remain unnamed, says there is long-standing conjecture that the companies may merge.

"The difference now is that MTN could be the aggressor. And when you think about it, it does make a lot of sense for MTN as it would enable it to leverage its African assets going forward," he explains.

The rumour-mongering also provides some perspective to the announcement by Telkom's acting CEO Reuben September that the company is reviewing its mobile strategy.

Last month, September told analysts and investors that the company was considering its mobile partnership and admitted it had probably reached a crossroads with partly-owned Vodacom.

Although talk of friction between Telkom and Vodacom came as no surprise to the market, the analyst says suggestions that Telkom may consider letting go of its "cash cow" certainly did excite the market.

"Speculation soared after the announcement. We looked at several outcomes for Telkom's mobility review. On one hand, it could be looking to sell its stake in Vodacom to co-owner Vodafone. Its mobility strategy could then be facilitated by the acquisition of Cell C and Virgin Mobile. It might also consider going the service provider route like Nashua Mobile and sign agreements with all the cellular operators," he explains.

"On the other hand, Telkom could list Vodacom separately and enter a purely commercial agreement with the company, while still maintaining equity earnings."

BMI-TechKnowledge senior telecoms analyst Richard Hurst is also aware of the buyout talk and says it could be an interesting move for MTN.

"Last year, we posed the question that mobile operators may be positioned to swallow their fixed-line counterparts. When you look at MTN's local business, they have had great opportunities in terms of data, but have failed to cross the line. With Telkom as part of the company, they could start looking at bundling packages which would give them a better position in the market."

As for MTN's emerging markets strategy, Hurst comments that a Telkom buy would give it direct access to the SAT-3 cable landing points in many of its African operations. Additionally, the technology-neutrality of the carrier licences offered in many African operations would mean it could offer a variety of solutions to the market.

Although the acquisition could be tempting for the cellular operator, it would not be without challenges, say commentators.

As an example, Hurst points out government may be unwilling to part with its 38.8% shareholding in Telkom, while MTN may prefer not to have government as an active shareholder in its business.

"MTN likes to move quickly; it's a dynamic business. If the Telkom acquisition comes with government as a future shareholder, I very much doubt MTN would go through with the deal," he explains.

World Wide Worx MD Arthur Goldstuck adds the deal probably would not receive Competition Commission approval.

"If MTN were to be given permission to acquire Telkom, it would reduce the level of competition among the major players. Competition authorities can't change a relationship that has spanned 15 years, but they can prevent a new industry structure which has the potential to be anti-competitive."

As for the investor market, the analyst says acquiring a fixed-line operator would probably result in a reduced rating for MTN.

"If you look at the international telecoms market, combined fixed/mobile companies generally have lower earnings ratios going forward. Mobile is where the growth is at and integrated plays simply don't trade at the same level of pure mobile," he comments.

In response to the speculation, Lulu Letlape, Telkom's group executive for corporate communications, says: "Telkom never comments on market speculation. As you are aware, Telkom is currently conducting a review of its mobile strategy. The review is not complete and Telkom will provide more information to the market when we are ready to do so."

"The MTN Group does not comment on market speculation," says Nozipho January-Bardill, MTN group executive of corporate affairs.

As such an acquisition would be material to both companies, firm negotiations would require them to issue a cautionary announcement on the Stock Exchange News Service. No such notices had been posted at time of publication.

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