Telkom appeal can backfire, warns legal expert

As Telkom’s shares dipped back below R18 on the JSE, a legal expert has warned that the telecom firm’s plan to appeal a recent market dominance abuse ruling could backfire, with its multi-million rand penalty being increased rather than rescinded.

At close of play on Wednesday, Telkom lost 55 cents, or 2.99%, to R17.82, giving it a market cap back below R10 billion (R9.28bn). The group fell to a low of R16.02 on 22 July.

Last month, the Competition Tribunal imposed a penalty of R449 million on Telkom SA for abusing its dominance in the telecommunications market between 1999 and 2004, a period in which Telkom was a monopoly provider of telecommunications facilities.

The Tribunal concluded that Telkom leveraged its upstream monopoly in the facilities market to advantage its own subsidiary in the competitive value added network market – Telkom’s conduct caused harm to both competitors and consumers alike and impeded competition and innovation in the dynamic VANS market.

The Competition Commission had asked the tribunal to fine Telkom R1.2 billion if it was found guilty, having originally asked for a penalty of R3.5 billion, or 10% of the group’s earnings.

Telkom advised on August 30th that it would appeal the fine and was provided forty business days to file the record of appeal before the matter can be set down for hearing by the Competition Appeal Court.

“The Competition Tribunal (Tribunal) has already ruled and imposed the fine. The appeal is before the Competition Appeal Court (CAC), which can, in principle, replace the tribunal’s ruling with its own, or send the matter back to the tribunal if the CAC believes it failed to consider all required facets.  If the process is based only on Telkom’s appeal, the CAC will not increase the fine,” said Chris Charter, director for competition at Cliffe Dekker Hofmeyr.

“However, if the Commission cross-appeals (which is likely) the CAC can side with the Commission and increase the fine. The risk Telkom runs by appealing is facing a cross-appeal and losing that – a backfire in the classic sense,” he said.

“There were some elements of the Tribunal’s calculation of the fine that were not altogether clear (especially the basis for the discount afforded to Telkom) that may give the Commission a basis to challenge the quantum,” Charter concluded.

Half of the penalty was due to be paid within six months of the Tribunal’s decision, while the balance is payable within 12 months thereafter.

Ratings agency Moody’s warned that the fine was credit negative, as it would reduce cash flow and increase leverage for fiscal years ending March 2013 and 2014.

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Telkom appeal can backfire, warns legal expert