• MTN is seeking to beef up its presence in South Africa
• The pan-African operator is in talks to acquire Telkom SA
• Any such combination would provide a much stronger rival to Vodacom
• Regulatory hurdles would be very high

Pan-African operator MTN has made an audacious bid to strengthen its presence in South Africa by entering into talks to acquire smaller rival Telkom SA, the telco announced in a stock market note issued on Friday morning.  

“Shareholders are advised that MTN and Telkom SA SOC Ltd. (Telkom) 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 (the Transaction),” stated MTN. “Discussions are at an early stage and there is no certainty that the Transaction will be consummated,” it added. 

Shareholders of both companies seemed pleased with the news, as Telkom’s share price soared by 33% to 44.58 rand (ZAR) on the Johannesburg stock exchange, giving it a valuation of 22.55bn ZAR (US$1.3bn) and MTN’s stock gained 7.4% to hit 144.88 ZAR.

But it’s hard to see how such a deal wouldn’t face massive regulatory hurdles given it would effectively combine the second- and third-largest mobile service providers in the country and reduce competition. In addition, Telkom holds significant fixed-line assets.  

MTN South Africa ended March this year with 34.5 million subscribers, of which 7.5 million were on post-paid contracts, while Telkom SA had almost 17 million mobile customers, of which 2.7 million were on post-paid contracts. Combined, the two operators would have more than 51 million mobile customers, based on the numbers at the end of the first calendar quarter.

Vodacom, South Africa’s mobile market leader, ended March with 52.1 million mobile connections, of which 6.5 million were on a post-paid contract and 6.6 million are internet of things (IoT) connections.

In effect, in terms of mobile connectivity, a combination of MTN and Telkom would create a company that could easily become the new market leader.

But it also would remove an option for subscribers: Apart from Vodacom, MTN and Telkom, only Cell C has scale (it claims to have about 13 million customers), while Rain is a competitive mobile data services option with only a few million customers. Removing Telkom from the picture would restrict customer choice, leaving MTN with some competition and regulatory challenges to complete a deal, especially as both companies picked up new licences in the 4G/5G spectrum auction held in March: MTN acquired 100MHz of capacity across the 800MHz, 2.6GHz and 3.5GHz bands, while Telkom SA landed 42MHz of capacity in the 800MHz and 3.5GHz bands.

The ball now is in the hands of the two companies and their shareholders before the authorities get involved. That’s a lot of hurdles to leap over before any kind of deal might get done.

- Ray Le Maistre, Editorial Director, TelecomTV