Rain proposes an integration with Telkom but faces hurdles
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Rain proposes an integration with Telkom but faces hurdles

Rain, a South African mobile data-only network, announced that it had made a formal request to the Telkom board of directors to present a proposal that would result in the merger of the two companies.

According to Rain, the merger would create a formidable third major player to compete with South Africa’s leading mobile network operators by subscriber base, Vodacom and MTN.

Telkom and Rain are the country’s third and fourth largest mobile network operators.

Rain’s announcement is noteworthy in light of Telkom’s recent announcement that it was in talks with MTN about a possible 100% acquisition of itself by the latter for a combination of shares and cash.

Rain explicitly stated in the announcement that the proposed merger with Telkom, a 40% government-owned entity, was a “logical alternative to [Telkom] simply selling to MTN and would also be consistent with the government’s pro-competitive policies.”

But Rain’s case isn’t just about preventing the ostensibly anti-competitive MTN-Telkom merger. The company has also highlighted several points that would make the transaction a sound business venture.

To begin, it highlighted the potential synergy that would result from the merger of Telkom’s infrastructure and mobile businesses with Rain’s 4G and 5G businesses.

Rain’s business model when it was founded in 2016 was focused on building a 4G network and being an early entrant into the then-nascent 5G market. That strategy appears to have worked well, as the network now offers Vodacom 4G roaming across its network. According to the company, the combined data traffic of its retail customers is now equal to that of Vodacom, MTN, and Telkom.

Rain’s second business case for the merger stated that the combined Rain and Telkom sites would be equivalent to those of Vodacom and MTN and that eliminating duplication would result in material capital and operational cost savings.

Rain cited the 5G rollout as the third business case. The company believes that a merger would allow Rain to leverage Openserve’s fibre network and Rain’s 5G expertise to accelerate the rollout of 5G nationwide, attracting new customers as the home broadband market grows.

Despite Rain’s lengthy and detailed explanation of its proposal, not everyone is convinced. The Takeover Regulation Panel (TRP) of South Africa, tasked with evaluating all merger and takeover documents submitted following the country’s Companies Act, is one unimpressed party.

The regulatory body stated in a statement issued a few hours after Rain’s announcement that the company’s communication was issued without prior approval from the TRP, as required by the Companies Act. It requested that Rain retract the announcement and advised the public to disregard it.

If Rain can overcome the TRP barrier, it will be interesting to see how Telkom reacts to the proposed merger.

Will Telkom, as a majority government-owned entity, reject Rain’s proposal in favor of pursuing a more lucrative acquisition by MTN? Because of its anti-competitive nature, this option will likely face intense regulatory and political scrutiny and opposition. Or will Telkom consider the Rain proposal, which, while less profitable for shareholders in the short term, is likely to face less regulatory and political opposition and could result in a triopoly in South Africa’s telco industry?

However, in response to Rain’s announcement, Telkom stated that the network had not made any formal offer or proposal.

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