MTN’s deal to purchase Telkom would be a boon, immediately transforming the telecom giant into the country’s largest mobile and fixed network operator benefitting from the incumbent’s extensive nationwide network infrastructure, according to Fitch Solutions.

Using the latest data (Q1 2022) available from the operators, MTN’s market share is estimated to increase to 48.4% with the acquisition of Telkom’s 16.94 million subscribers it reported for the year ending March 2022.

This would cause the telco to take-over the position of current market leader Vodacom. As a result, South Africa’s mobile market would effectively approach duopoly status, with smallest MNO Cell C and the MVNOs unable to engage in meaningful competition with the primary players.

Demand for Telkom’s mobile services have shown consistent growth since the telco re-entered the mobile segment in 2010, and it was the only operator not to have recorded subscriber losses during the Covid-19 pandemic.

“Telkom’s aggressive pricing strategy has served its growth accordingly and allowed it to secure subscribers at the expense of the other market players. Exposure to Telkom’s growth trajectory could reverse the volatile trend of customer acquisition and retention that MTN has faced over recent years.”
Fitch Solutions

According to Fitch Solutions, MTN would also gain access to Telkom’s spectrum holdings, the primary appeal here being the latter’s 22MHz of spectrum in the 3.5GHz band that it acquired during the long-awaited 5G spectrum auction that occurred in March 2022.

Spectrum in the 3.5GHz band is critical for deploying 5G and is therefore key to generating additional value.

Moreover, collecting Telkom’s spectrum would also give MTN superiority in terms of overall spectrum holdings after Vodacom emerged from the auction as the biggest spender.

MTN’s Benefit for the Acquisition

Despite the obvious benefits to MTN’s mobile market share that an acquisition of Telkom would bring, the main attraction to Telkom is its extensive wholesale fibre optic network, Openserve.

Telkom operates by far the longest network in South Africa with more than 170,000 kilometre (km) of fibre optic cables and this network is growing.

Telkom reported in Q1 2022 that the number of homes passed and homes connected had increased by 52.7% and 38.4% year-on-year, respectively. The operator also claims the market’s highest connectivity rate of 46.3%. These factors make Telkom an attractive asset for acquisition.

However, a reduction in competition in the mobile market will see the opposite effect occur if MTN’s deal were to go ahead. Lowering the number of players in the mobile market- and removing Telkom’s competitive pricing- will lead to higher prices for consumers, likely to weigh on South Africa’s price sensitive market.

Data package prices in the country are already high despite competition and tangible efforts from operators to reduce the total cost of ownership of smartphones.

The upheaval in market dynamics that would occur in the event of MTN’s acquisition of Telkom will stimulate a substantial level of regulatory scrutiny. Consequently, Fitch expects that a deal in its current form (MTN’s total acquisition of Telkom) will be denied by the Competition Commission.

Fitch Solutions said the Commission has not yet received formal notification that a transaction is to take place and discussions between the two telcos are in their early stages.

“We suspect these discussions will involve attempts to structure the deal in a regulatory-friendly manner, although the form this could take is currently unclear. As a result, it is unlikely that we will see any deals reached in the near term.”
Fitch Solutions