Huge takes on Goliath

Summit TV speaks to James Herbst from Huge Group as they take on cellular network provider MTN over rights to the controlling stake in iTalk Cellular

Giulietta Talevi: As you might have seen in the Monday Business Day newspaper giant MTN wants to sink the R511million deal between the Huge Group and iTalk Cellular, but the story doesn’t end there. At Summit TV is financial director at Huge Group James Herbst. James, to clarify the situation MTN owns 41% of iTalk Cellular and the Bebinchand Seevnarayan Trust owns the other 59% which is the stake you want. Why is MTN going to try and scupper you getting that 59%?

James Herbst: I think it is understanding the value of the business in the marketplace from a competitive positioning perspective, and then having a look at the risks inherent in having Huge Group acquire that stake - it is a controlling stake so that would allow Huge Group certainly in terms of the control of that stake a fair amount of latitude. I think that is what MTN are trying to prevent - they obviously feel that Huge Group are a threat in the marketplace from a competitiveness perspective, and that’s the reason that they’re acquiring it. They will have their arguments as to why they’re acquiring - but I think it boils down to at the bottom line competitive risk.

Giulietta Talevi: We were talking earlier and you mentioned iTalk Cellular is one of the last remaining service provides in the market - you’ve got Nashua and Altech Autopage - so iTalk is the last one. Is that why it is such a valuable asset?

James Herbst: For us we’ve bandied about the marketplace the concept that it’s the last generator on the shelf, and the lights are about to go out from a telecommunications perspective - and the competition in that environment. When the asset came up for sale we were very quick in making a move for it. It holds incredible value…

Giulietta Talevi: If you can perhaps tell us a bit about the history of why MTN had a pre-emptive right to this asset - they decided to waive that right, which seemingly looked like the all clear for you to take it over - but then that changed. Can you just take us through that?

James Herbst: We started the process in mid-2007 and you go through a number of iterations with the vendors in this case in terms of trying to strike a deal - we struck a deal in November of 2007 and we then followed the process of giving MTN their due right of pre-emption, in terms of the shareholders agreement between the Bebinchand Seevnarayan Trust and MTN as it relates to iTalk. They came back on 7 December 2007 saying “we waive our rights to pre-empt” and on that basis we proceeded with the deal and we went to conclude formal agreements in that regard. That was done around February or March 2008. At that particular point MTN then came back to us on certain procedural inconsistencies in terms of the way the vendors had conducted the offer process that was required in terms of the pre-emption. On that basis we started getting into a little bit of a battle as to who was right and who was wrong. From a Huge Group perspective taking into account the risk of acquiring an asset and transferring the sell interest - we could be left with a situation where MTN takes the matter to court and interdicts us, and they did threaten to interdict us - and we could have an asset that is ultimately left in suspense for a couple of years while the courts sort it out.

Giulietta Talevi: Of course MTN being a much larger company presumably has a massive legal budget that they could fritter away…

James Herbst: Absolutely. I think if you look at the competitive positioning of iTalk and the potential that it holds - it would be in MTN’s best interest to hold that up in a legal battle for as long as it can. The subscribers on their own I don’t think can make a meaningful contribution from an MTN perspective - that they’ve got a reasonable market share - and they’re naturally going to argue in competition law that the incremental benefits of the iTalk subscribers is certainly doesn’t substantially lessen competition…

Giulietta Talevi: But you would think otherwise. What makes you confident that your application to the competition authorities is going to get Huge Group this asset?

James Herbst: We’ve discussed the matter with legal counsel and we have given instruction in this regard. We certainly believe that the merits of our case are strong, and we do have a number of aspects to our case that give it that strength - but it would be very poor on my part to actually discuss what we believe our winning strategy is in relation to the competition.

Giulietta Talevi: Why do you think MTN might not have a case?

James Herbst: MTN are going to argue that they have an overwhelming market share already, so the incremental benefit from having iTalk is low and on that basis it doesn’t substantially lessen competition. I think there’s a whole lot of other factors that need to be considered, and I think the market is certainly aware of what those issues are - we will naturally be one of the parties that raise those issues to the Competition Commission, and we are hoping they make the right recommendation to the Tribunal.

Giulietta Talevi: So you’re pretty confident?

James Herbst: We are very confident. We wouldn’t oppose this unless we felt we had a good case in law.

Giulietta Talevi: Of course you have previously stated that the acquisition of iTalk Cellular is a very important deal for Huge Group - it’s going to be a substantial boost for the revenue - so it’s got to go through…

James Herbst: We didn’t buy iTalk for the revenue and the contract base that it has, but for the opportunity it presents from a competitive landscape perspective - so acquiring iTalk was more than acquiring 130,000 subscribers it’s about acquiring a licence to compete in the marketplace at a service provider level. That was what was more important to us, and that’s the value ascribed to this asset...

Giulietta Talevi: We will chat to you as this case progresses.