Rain, a mobile network operator in South Africa, has seen its valuation soar to R25.91 billion, significantly surpassing that of Telkom, which stands at R17.79 billion. This dramatic rise highlights a shifting landscape in the telecommunications sector, raising both eyebrows and questions among investors.
According to the latest half-year results released by African Rainbow Capital Investments (ARCI), Rain’s valuation grew by nearly R1 billion between June 31 and December 31, 2024. This impressive growth followed an additional R172 million investment by ARCI, bringing their total shareholding in Rain to 21.76% and valuing that stake at R5.639 billion. Currently, Rain constitutes 27.2% of ARCI’s holdings, marking it as the largest investment within the fund, which is chaired by South African billionaire Patrice Motsepe.
Rain’s valuation has skyrocketed over the past eight years, increasing by R16.45 billion from R9.46 billion in December 2017. Such gains have made it a focal point of industry discussions, especially when compared to Telkom, a once state-protected telecommunications monopoly that boasts over 170,000 kilometers of fiber infrastructure.
As the landscape becomes more competitive, major telecom firms are increasingly scrutinizing each other's financials. ARCI's figures suggest an optimism about Rain’s growth potential, yet this view is met with skepticism by many investors due to a glaring lack of financial transparency. For instance, while Johan van Zyl, co-CEO of ARC, revealed that Rain’s earnings before interest, taxation, depreciation, and amortization (Ebitda) stood at R2.5 billion as of June 30, 2024, he withheld crucial figures regarding revenue, profit, or subscriber metrics. “To come with subscriber numbers here and there and just lump them all together will not make sense,” Van Zyl explained.
In stark contrast, Telkom reported an Ebitda of R10 billion for the same period, evidencing a sizeable disparity. Moreover, Telkom Mobile’s annual Ebitda of R5.3 billion, calculated from its quarterly data, further emphasizes the gap when juxtaposed with Rain’s figures.
The telecom market's dynamics are evolving, and as Rain's valuation continues to garner attention, the scrutiny around its operational performance grows. Critics argue that a lack of transparency undermines investors' confidence in the current valuation. The history of South African telecom firms showcases the challenges of maintaining a profitable operating model, as demonstrated by Cell C's difficulties. Such pressures raise speculation about whether Rain can sustain its low capital expenditure model while continuing to scale its operations.
Investors have long voiced their concerns about the clarity of financial operations at Rain and ARCI's refusal to disclose more financial details has only amplified these worries. The reluctance to release subscriber and revenue figures leaves potential stakeholders assessing whether the reported valuation accurately reflects the company's financial health.
Amid this growing scrutiny, ARC announced a plan to delist from the Johannesburg Stock Exchange (JSE) and re-domicile from Mauritius to South Africa. The company stated, “To facilitate the delisting of ARCI, ARC and ARC SPV have offered to acquire all the issued ordinary shares in ARCI not already owned by ARC and ARC SPV.” This proposal includes an offer of R9.75 per share in cash, a price representing a 12.6% premium over its previous closing price of R8.66, and a 21% premium over the 30-day volume-weighted average price of R8.06. However, the offer also reflects a 22.8% discount to the net asset value per share detailed in ARCI’s interim results.
With limited public shareholding and liquidity, ARC has a rationale steeped in the investor's perception of the company's value. The statement from ARC noted that “the ARCI share price also does not reflect the true value of the investment in the ARC Fund and trades at a discount to the net asset value of the ARC Fund,” highlighting the disconnect that exists between market perception and true value.
As the telecommunications market in South Africa evolves, Rain's ascent raises important questions about valuation, transparency, and operational models. The coming months will be crucial in determining whether Rain can maintain its growth trajectory and how the broader market will react to ARC’s consolidating moves.
