Telkom gains muted after KT Corp update
Shares in Telkom advanced modestly in afternoon trade on the JSE on Tuesday (8 May 2012) after the group said it has reached an in-principle agreement regarding the terms of a potential strategic venture with Korea Telecom (KT) Corporation.
KT is acquiring a strategic equity shareholding of 20% in the post-issue ordinary share capital of Telkom by way of a specific issue of shares for cash.
By 13:00 local time, shares in Telkom gained 11 cents to R23.42, having gained more than 1.5% in earlier play. The All Share Index slipped 0.55% lower to 33,768 points.
Telkom and KT agreed to a revised cash issue price for the new Telkom ordinary shares to be issued to KT under the Potential Equity Investment of R25.60 per new Telkom ordinary share.
The SA firm said in October that 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).
Fred Teeling-Smith, an analyst at STANLIB said: “The agreed price of R25.60 is significantly below the R36.06 price announced on 14th October 2011 but then the share price has fallen from R33 to around R23 so it is not surprising that the price has been reduced.”
The analyst said that the price fall has been largely as a result of the significant Competition Commission fine speculated.
Telkom is awaiting the outcome of a decision by Competition Tribunal on charges of anti-competitive behaviour and abusing its power and market position in a case dating back to 2004.
The Competition Commission has asked the tribunal to find the group guilty of excessive pricing and wants the company to be fined R3.5 billion – approximately 10% of its earnings.
“It is surprising that the KT price is not actually structured to take into account a lower fine than the market is expecting, ie if the Competition Commission rules that no fine is payable then I would have expected the Telkom price to react very positively but there does not appear to be any upside adjustment to the proposed KT price,” Teeling-Smith said.
“In addition, the total dilution to existing shareholders is actually 25% (KT resultant shareholding post the issue is 20%) for a cash injection of R3.3 billion. Shareholders are selling a quarter of the company for approximately half of next year’s capex spend,” the analyst noted.
He further stressed that the big unknown factor which the market needs visibility on is clarity around their mobile strategy.
“Their current strategy is not working and the question to be asked is how much money they are going to lose going down the current path and how much incremental capex they will require to spend to develop a leading fixed line data network?”
STANLIB said that Telkom’s wholesale business is very good, “perhaps they should be thinking of only a wholesale strategy rather than trying to bring in a strategic shareholder to help them fix their retail strategy,” Teeling-Smith said.
Rivals
Rival operator, MTN declined R1.30 to R13.99. The group made strong gains on Friday (4 May 2012) “after it released fairly positive 1Q numbers after the expectation was for a poor 1Q,” STANLIB said.
MTN Group reported a 3.7% rise in subscriber numbers for quarter ended 31 March 2012, to 170.573 million.
“The Group delivered a satisfactory performance notwithstanding continued high levels of competition in key markets,” it said in a statement.
MTN South Africa contributed 13.3% to group subscribers “and delivered a sound performance in a mature market”. It increased its subscriber base 3.2% for the quarter, to 22.735 million, MTN said.
Teeling-Smith hinted that the negative sentiment around MTN would take a while to change. The group is facing a court case in the US.
Vodacom was flat at R106.75. “Vodacom remains in investors eyes a more medium term stable play with a good dividend yield,” STANLIB said.
Altron
JSE-listed Allied Electronics Corporation Limited (Altron), meanwhile, added a tame five cents to R25.05 on the JSE after announcing mixed results.
Revenue for the year ended February 2012 increased by 3% to R23.6 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) decreased 7% to R1,946 million against the comparative year in 2011.
As a result of a higher than normal tax charge, adjusted diluted headline earnings per share declined 15%.
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