MTN wants to buy Telkom with cash and or shares

MTN & Telkom issue cautionary

The MTN Group and Telkom have entered into discussions, whereby the intent is for MTN to acquire the entire issued share capital of Telkom. Talks are in early stages and there is, as of yet, no guarantee that a deal will be made. MTN has indicated that if talks are successful it would look to fund the purchase with either MTN shares or a combination of MTN shares and cash.

Regulatory approval

Should the companies reach a deal, the transaction would still be subject to regulatory approval. The Independent Communications Authority South Africa (ICASA) and Competition Commission (CC) would be the relevant regulatory authorities in this regard.

What if the deal is agreed and finds regulatory approval?

A concluded agreement with the relevant regulatory approval suggests that that Vodacom and MTN would account for nearly 90% (45% / 44% split) of South African mobile subscriptions, with Cell C still maintaining roughly 10% to 11% market share in this regard.

Perhaps more relevant for MTN is the increased fibre network opportunity the acquisition of Telkom would bring. Telkom’s Openserve currently connects roughly 400 000 homes to its fibre network, second only to the Vuma infrastructure which has roughly 25% more fibre to the home connections.

Thoughts on the deal

The deal suggests an unlock of value in the Telkom assets, whilst giving MTN a dominant share in both the mobile subscription and fibre to the home departments. Telkom offers the only real sizeable domestic fibre opportunity left after the Vodacom and DarkFibre / Vuma deal. The alternative is the time and capital intense building of infrastructure.

However, we don’t see short term resolve on the acquisition as likely. Even if an agreement is reached, passing multiple regulatory authorities (CC and ICASA) could delay even a successful transaction by at least a year.

Telkom

The recent cautionary news has seen the share price of Telkom breaking resistance at 3695. The upside breakout also suggests a short term trend reversal from down to up as the move follows a double bottom price pattern (‘W’ shaped price action below the 3695 level).

Our preference is not to trade shares under cautionary, but traders looking purely at the technicals might hope for the first pullback from the breakout to bring the price back towards the breakout level at 3695. It is at this level breakout traders might look for a second long opportunity from the initial breakout targeting a retest of the 4520 high. In this scenario a stop loss at the 3445 level would be considered.

MTN

The share price of MTN currently trades in a near term range between levels 13220 and 14540. Traders Looking to reinstate long positions on the company might prefer to see a close above both range and trend line resistance before targeting a move back towards the 15820 level. In this scenario the midpoint of the range might be used as a stop loss indication for the trade.