MTN’s Telkom tango: A love-hate pas de deux

MTN’s CEO Ralph Mupita has somehow managed to both confirm and deny rumours that the cellphone company might renew its bid for Telkom.

Neat trick, you might say. How does that work?

The denial part is pretty clear: “There are no talks with advisers between ourselves and Telkom. We did discuss this at some time in the past, but there are no active discussions,” Mupita told a press briefing on Friday after Bloomberg reported that MTN might be suiting up for a second tango with Telkom. The report caused a 13% bump in the Telkom share price last week, before Friday’s 8% slump on the deal denial.

In some ways, the confirmation part was more interesting. First, said Mupita, he could not rule out future talks, which sounds very pro forma. 

And second, he went on a long discourse about the global reduction in the number of players in specific markets, as well as postulating that the rollout of fibre has now run its course.

“Ghana four years ago had four players. That hasn’t worked, for good reasons. India used to have 16 players about nine years ago, and now it’s down to two and a half.

“We’ve always believed that the ideal is what we call two-and-a-half-player markets for the profit pools that we see. China’s got three players. The US has three players. The UK is consolidating as well. Europe is consolidating and Africa is behind the curve on a global consolidation wave.”

So obviously, Mupita is talking his book: as one of the big two players, MTN would be the consolidator rather than the consolidatee. 

But there is more to this than immediately meets the eye. A recent Vodacom-Remgro fibre deal, endorsed by the antitrust authorities, changes the regulatory backdrop. It signals that consolidation may now win approval, where once it did not. 

Mupita made hay with this notion, calling it “a major inflection” point. South African competition law was previously more European-framed, focused on encouraging multiple competitors, with very little focus on investment, he said. 

What is happening now is that the authorities are minded about competition, but also minded about investment, “which is what we’ve seen in the markets that are building very strong digital infrastructure … They end up being two-and-a-half-player markets. I would see South Africa defying gravity if it could sustain four players,” he said.

This has been a long-established argument of cellphone companies: that the size of profit pools don’t allow a huge number of players and simultaneously maintain the levels of investment required to keep up with the technology requirements, which are still exploding. Whether you believe this depends on whether you prize cheaper cellphone costs, or better digital technology. 

But the fact is that many African countries still need to make the jump to smartphone usage, which will require huge infrastructure rollouts. 

Assuming that MTN and Telkom aren’t twirling on the dance floor just now, but that the orchestra is still tuning up, would a merger even be viable? The answer to that is also up in the air. 

Share price moves

One problem for MTN is that when it made its first takeover bid in mid-July 2022, news of an approach drove Telkom shares as much as 33.3% higher, to about R44. When the talks collapsed in October 2022, Telkom’s share price plummeted about 25% to trade at about R35.

But Telkom’s shares at R51 are actually higher now than the high point of trading during the previous bid, which suggests if MTN were to make another offer, it would have to explain to shareholders why, in its view, Telkom is even more valuable now than it was then. 

One of the arguments it could cite is simply that even after Telkom’s recent gains, it’s still trading at a modest earnings multiple of 9.4. That compares to MTN’s price-earnings multiple of about 33, which means even at a higher bid price, say about R65, the acquisition would be earnings accretive for MTN.

That’s visible in the MTN share price, which unlike Telkom barely moved on the rumours, suggesting investors weren’t worried about dilution. MTN is after all much bigger (it has a market cap of R256bn, against Telkom’s R26bn) and it has other not-inconsiderable problems on its plate. Chief among these is a US grand jury investigation into whether it helped terrorist groups in Afghanistan – where it has since sold its subsidiary – and whether it bribed Iranian officials to win a mobile licence back in 2005.

The other factor is Mupita’s belief that the expansion of fibre to the home is basically done in South Africa; any further expansion can’t possibly be profitable because the high population concentration areas are now fully served. The consequence is that for MTN, which wants to focus more on home connectivity, the option of building a competing network is more or less closed. That means, as Mupita pointed out, the options for MTN will by necessity focus on acquisition if it wants to go down this route – and this is the area in which Telkom is strongest.

In other words, there might not be a bid in the water at the moment, but expect MTN’s pas de deux to continue. 

_{Top image: Tenor/ Currency collage.}