Telkom fine clarity positive for KT deal – analysts
A potential R3.5 billion fine facing Telkom (TKG) for abusing its market dominance would not impact on the long-term structuring of a potential deal with KT Corporation, according to analysts.
In October, Telkom entered into discussions with Korea based KT to explore KT potentially acquiring a strategic equity shareholding of 20% in the post-issue ordinary share capital of the group.
At the end of January, Telkom advised shareholders that a “diagnostic review” concerning a potential deal with KT “is well progressed” adding that both companies expected to finalise their findings within the next few weeks.
The outcome of Telkom’s abuse of dominance case is expected Wednesday (15, February).
The Competition Commission asked the Competition Tribunal that Telkom be fined 10% of its earnings, or R3.5 billion, for abusing its dominant position in the telecoms market by charging excessive prices.
Irnest Kaplan, founder and MD of Kaplan Equity Analysts told BusinessTech: “To get dealt a fine of this size would be materially bad, but it won’t be the end of the group. It won’t close down tomorrow, but it would affect them really badly.”
Kaplan said If KT corp was interested in Telkom, it was likely to have taken a long-term view of the Telkom’s potential.
“If KT has taken a long term view of Tekom, I can’t see it (a R3.5 billion fine) changing their view. It might change certain mechanics of the deal structure over the short-term, but not the long-term strategies.”
Graeme Teeling-Smith, a telecoms analyst at STANLIB said: “This is not a new issue facing Telkom and the maximum quantum of the potential fine has been known in the market for some time. I would be surprised if the ultimate fine is as high as R3.5 billion but an amount significantly lower than this is probably a reality.
“Any clarity around the quantum of any fine is probably a positive for finalising a deal with KT corp as it removes a level of uncertainty for a new shareholder buying into the company.
“What is obviously of concern would be the level of pricing of any deal with KT corp. The original announcement in 2011 referred to a transaction being done at a price of R36 per Telkom share, with the current price at below R28 per share that level of pricing for the KT corp transaction looks increasingly optimistic.”
Telkom said in October that, should the two companies reach an agreement, KT would buy Telkom ordinary shares, by way of a specific issue of Telkom shares, at a price of R36.06 per share – which if implemented, would result in KT having a 20% interest in the post-issue ordinary share capital of Telkom, worth about US$600 million (R4.7bn).
KT has a market capitalisation of approximately US$10 billion.
The group is a market leader in the Republic of Korea’s fixed and broadband segment with an 86% and 45% market share respectively, and number two in the mobile business (32% market share, with approximately 16.8m subscribers).
At close of play on the JSE on Tuesday, shares in Telkom slipped 69 cents or 2.45% to R27.51.
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