Telkom Hangs Up On Talks

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What could have been the largest takeover in South African corporate history has been shelved, with Telkom South Africa announcing on November 28 it had called off negotiations to sell some or all of its operations to Vodafone Group and mobile service provider MTN Group.

Telkom had announced in early September that it was in talks with both Vodafone and MTN, with the negotiations being given the blessing of the government soon after. The Department of Communication has been keen to unload some or all of its 38% stake in Telkom, in part due to the criticism levelled at it for both regulating the telecommunications sector and owning a slice of the industry.

The three-way negotiations centred on Vodafone increasing its stake in Vodacom, the South African mobile telephony service provider in which it is an equal partner with Telkom, and on MTN acquiring some or all of Telkom's land line operations.

Though the nearly three months of negotiations have been fairly low key, with few public statements from any of the involved parties, there was little indication that progress was not being made until Telkom's announcement.

"As discussions with Vodafone regarding Telkom's investment in Vodacom were subject to agreement being reached with MTN, Telkom shareholders are advised that discussions with both MTN and Vodafone have been terminated," Telkom said.

Having studied the strategic, operational and regulatory angles of the deal with MTN, Telkom said a sale could not be carried out that would be in the best interests of their respective shareholders.

"This decision was driven primarily by matters related to the anticipated costs and benefits of the implementation of the transaction," the company said in a statement.

Telkom said its board would continue to pursue "all options to enhance the company's strategic positioning and service delivery in the converging fixed-mobile telecommunications industry".

Telkom's statement said the company had fielded other expressions of interest in its operations, though no negotiations were being conducted with other parties at present.

The news had an immediate impact on Telkom's shares, which dropped more than 10% within hours of the announcement. This was roughly the same amount its share gained following its opening talks with MTN and Vodafone in September. Inversely, MTN's shares regained the 3% they had shed when MTN had entered the buyout negotiations.

None of the three firms has actually declared what was on the table in terms of stakes on offer or how much money was involved in any prospective bids. In mid-September, soon after negotiations were opened, South African firm Coronation Fund Managers valued Telkom's fixed line assets at $17.2bn, while its 50% stake in Vodacom was estimated to be worth $10.7bn.

Nor was there an explanation as to why the Vodafone negotiations hung on a deal being brokered with MTN.

Soon after the talks fell through, Vodafone flagged its intentions to renew the hunt for a controlling interest in its joint venture with Telkom.

"Consistent with our strategy, we remain interested in increasing our ownership in Vodacom at values that meet our mergers and acquisitions criteria," Vodafone said in a statement.

While still looking to make a renewed proposal, Vodafone said it remained committed to Vodacom and to its partnership with Telkom.

Until the launch of network operator Neotel last year, Telkom had held a monopoly in South Africa's fixed line market. With increased competition in both the landline and mobile markets, Telkom has seen its returns fall, announcing profits of $528m for the six months ending September 30, a fall of 18%. The company attributed the downturn to increased investments, higher operating costs and discounted services.

Other moves by Telkom to expand its base have met with limited success. Its bid to acquire computer services provider Business Connexion Group for $342m, part of a programme to boost data provision services, was rejected by antitrust authorities in June.

However, Telkom's newly appointed chief executive officer, Reuben September, has said the company would consider buying or forming partnerships with computer companies outside South Africa to improve its data, entertainment and other offerings. This would ramp up the direct competition with Vodacom and MTN, both of which have floated proposals to construct their own fixed-line networks for faster data services.

While this round of bargaining on the future shape of South Africa's telecommunications sector seems to have come to an end, it is likely that some or all of the players will come to the table again for a new hand when the cards are reshuffled.

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