Rain wants to merge with Telkom: asks to pitch proposal to board

Rain chairman Paul Harris

Rain is moving to scupper MTN Group’s talks to acquire Telkom. It plans to table a proposal to Telkom’s board that it should instead merge with the wireless broadband provider.

In a stunning development on Thursday, Rain said it will make a formal proposal to Telkom’s board that would ultimately result in the merger of the two companies.

In a statement, Rain said there is a strong case to be made for a Telkom/Rain combination as it would create a “5G powerhouse” in South Africa. It said the terms of transaction, including valuation and structure, would “still need to be agreed”. However, Rain said there is a “compelling business case in combining the businesses”.

The option to combine forces with Telkom would take the merged company to the next level

“Some consolidation in the industry is both desirable and inevitable as it leads to better utilisation of infrastructure. It should not, however, be at the expense of competition which promotes greater access for consumers to data at more affordable prices,” Rain said in clear criticism of the impact of a possible MTN acquisition of Telkom.

“The proposed merged entity would create a formidable third major player to compete with what is effectively a duopoly in South Africa,” it added.

“It is a logical alternative to simply selling to MTN and would also be consistent with the pro-competitive policies of government. The merger would bring together the considerable infrastructure and mobile businesses of Telkom and the successful, new-age 4G and 5G businesses of Rain.”

‘Fast growing’

Rain said it is an “established and fast-growing company with little debt and sufficient facilities to fund its growth”. It is, however, still small compared to Telkom.

Though it doesn’t provide much insight into its numbers, it said it reported more than R1-billion in earnings before interest, tax, depreciation and amortisation (Ebitda) in its 2022 financial year. Telkom’s 2022 Ebitda was R11.9-billion – almost 12 times as much.

Still, Rain said it is serious about pursuing a deal, saying the potential benefits are “numerous”. These include:

The number of combined Rain and Telkom sites will be equivalent to that of Vodacom and MTN and the avoidance of duplication would result in material capital and operational cost savings.
In 5G the opportunity would exist to leverage the fibre network of Openserve and Rain’s 5G expertise to accelerate the roll-out of 5G nationwide and further grow homes passed. “5G to the home is a very attractive alternative to ADSL, 4G and fibre, and can provide Telkom and Openserve’s existing home customers with a plug-and-play solution as well as attracting new customers as the home broadband market continues to grow,” Rain said.

“Rain’s prospects as a niche player are great. However, the option to combine forces with Telkom would take the merged company to the next level and benefit both Telkom and Rain stakeholders,” said company chairman Paul Harris. “It is a pro-consumer option in line with government policy and the business case looks compelling.”