Mergers, Acquisitions and Financial Results

Telkom has mounted a fresh bid to take over information technology company Business Connexion, raising its initial offer to R2,4bn, and gaining the support of five key Business Connexion shareholders.

The offer has raised eyebrows in the fiercely competitive telecommunications sector, with key players arguing that it could further enhance monopoly operator Telkom’s stranglehold on the industry.

News last week that Telkom had raised a previously rejected bid to a more generous R9 a share saw Business Connexion’s share soaring 91c to hit R8,95 before closing at R8,80. Telkom’s offer of R9 plus a dividend of 25c a share is worth R2,43bn, and is a 15% premium over Monday’s closing price.

Telkom has long had its eye on the information technology group, but Business Connexion’s board snubbed a formal bid last year as too low to be worth presenting to its shareholders.

This time Telkom is taking no chances, by wooing the shareholders before approaching the board. Five key investors holding more than 50% of the 262-million shares have given “a combination of written and in-principle support … to proceed with the potential offer”. Telkom said it would not be goaded into raising its bid again, and if this offer was rejected it would walk away. The amount Telkom previously bid was never made public, and Business Connexion’s financial director, Alan Farthing, declined to say how much more substantial the R9 offer was.

Asked whether investors were likely to accept this bid, Farthing said “according to Telkom, they have already have five shareholders with more than 50%”. Allan Gray is one of its largest institutional investors, and declined to comment on its position last week. Even if investors accept the deal, it may be scuppered by opposition from the industry.

Internet Solutions, a wholly owned subsidiary of Dimension Data, has said it will approach the Competition Commission with an objection if Telkom attempts to buy any IT player. Internet Solutions CEO Angus MacRobert said Telkom already dominated the market for telecommunications infrastructure and should not be allowed to absorb any player that would let it dominate the market for IT services as well.

Far from being allowed to increase its stranglehold, Telkom should have its wholesale, retail and internet divisions torn apart by the Competition Commission, MacRobert said.

While the deal would be a major shakeup for the IT industry, it was small in terms of Telkom and its market capitalisation, one analyst said. “It’s a nice little deal to do but it’s not going to change the face of Telkom,” he said. “It’s a good fit because there is not much overlap and it will create opportunities for growth from the client base, product set and skills it will bring.

“Telkom will be buying good skills and relationships with corporations it didn’t have before.”

Business Connexion was also active in other African countries, and that would help Telkom to achieve its goal of African expansion, the analyst said. Together they could offer a range of voice, data and other technology services. Telkom holds R1,1bn in cash and is anxious to buy an IT company in order to broaden its services as its revenue from voice calls dwindles.

Its traditional income is under fire as people use cellphones rather than fixed-line phones, as a second fixed-line operator prepares to launch, and as more companies offer cheap calls over the internet. Taking over Business Connexion would give it “a meaningful presence” in software applications, technical support and business process outsourcing, Telkom said.