The fight for iTalk begins in South Africa

Mergers, Acquisitions and Financial Results

The Competition Commission has announced that it has recommended that the proposed transaction by MTN to purchase the remaining 59% of iTalk Cellular be approved.

"This announcement is purely the Commission's recommendation to the tribunal. It by no means implies a done deal for MTN," says Anton Potgieter, Executive Chairman of the Huge Group. "The legal processes and decisions that follow are of far greater interest and importance to us. We certainly plan to vehemently oppose this transaction and we can now apply to take our arguments before the Competition Tribunal and, if we have to, the Competition Appeal Court. Over the past months we have accumulated and prepared extensive evidence supporting the fact that MTN's bid is highly anti-competitive, and will have the effect of a substantial lessening of competition by removing an effective competitor from the market." Potgieter believes that this is a typical example of 'the 800lb gorilla' trying to assume control of the market by force. "MTN has clearly come to the realisation that as a competitor Huge could lower prices to the consumer, forcing the rest of the market to follow suit. Our involvement means we would be moving value away from MTN and into the hands of the consumer, which is why they are now looking to prevent this regardless of the cost."

According to Potgieter, the fact that the Competition Commission took more than 85 days to come to this recommendation is a good indication that there is substantial evidence that may prevent MTN being successful in its bid for iTalk. "It is clear that our opposing argument has been given careful consideration and perhaps the Competition Commission is unsure on how it should rule which is why it has left it up to the Tribunal to decide."

Huge Group submitted an application to the Competition Commission earlier this year to purchase the 59% of iTalk under dispute. Huge's application was approved unconditionally. Shortly after this approval was given, MTN decided to act on its right to purchase these shares. "The fact that MTN originally waived their pre-emptive rights and then did a u-turn on that decision, shows that they subsequently realised the impact a new, customer-orientated competitor with control of iTalk could make in the currently, highly inert and oligopolistic GSM handset market," he says. "MTN have already delayed the transaction by 15 months and we believe that they will continue to try and delay it even further in a bid to prejudice the business."

According to Potgieter, MTN is paying more than double the price of any other transaction of this nature - an amount of around R363-million cash, which pushes iTalk's enterprise value to roughly R615-million. Considering the number of current subscribers in the iTalk database this equates to around R4,700 per subscriber. "MTN is paying more than 100% premium over past transactions to purportedly gain the iTalk subscriber base. Taking into account their growth rates in places like Iran, and the organic cost of that growth, it seems implausible that they are purchasing iTalk for any other reason than to prevent the introduction of a potential competitor, in the form of Huge Group, by removing one of only three remaining service provider licences from the market," says Potgieter. "Paying this price for an acquisition in an economic downturn certainly casts reasonable doubt on their published reason for wanting control of iTalk," he adds.

Should MTN acquire iTalk, it would mean that there are only two service providers left in the market, Nashua and Autopage. MTN already owns 40% of the mobile market and acquiring iTalk will increase this market share and its dominance, thereby overwhelmingly and irrevocably tipping the market in favour of MTN versus its service providers. "MTN's strategy has been to purchase companies with 3% and 4% market shares over a period of time. However, if you buy this market share repeatedly you will end up with a majority market share, without ever having concluded any 'significant' transactions under current competition analysis," explains Potgieter. "If MTN is allowed to continue with this strategy it will ultimately substantially reduce competition and allow them to continue to take advantage of the consumer - and in fact, iTalk is very possibly the last hurdle to them gaining an unstoppable monopoly," he says.

"If MTN's bid is approved, it will indeed be a very sad day for the South African consumer," says Potgieter. "Less competition means less choice for the consumer, and essentially the service providers will be allowed to continue to charge exorbitant rates for their 'services' unhindered. We will continue to stand firm in our arguments and are confident that the Tribunal will agree with our reasoning and will block MTN's bid," he concludes.