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Moody’s warns on Telkom fine

Aug 13 2012 13:37
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Johannesburg - The Competition Tribunal’s R449m fine on Telkom [JSE:TKG] for abusing its dominance in the telecommunications market is credit negative as it will reduce cash flow and increase leverage for fiscal years ending March 2013 and 2014‚ ratings agency Moody’s warned on Monday.

The tribunal fined Telkom last week‚ but the fine was well below the Competition Commission’s recommended R3.2bn.

“The penalty also comes amid depressed operating performance over the past 12 months‚” Douglas Rowlings‚ associate analyst at Moody's‚ said.

The tribunal found that between 1999 and 2004 Telkom had refused to supply essential services to independent value-added network services (VANS) providers and induced customers to not deal with these VANS providers.

Moody’s said the penalty‚ assuming Telkom did not appeal the judgment‚ would result in the company paying R224.5m in the next six months‚ and another R224.5m in 18 months.

Telkom plans to spend R7.5bn in capital expenditure in the next financial year.

“With a cash balance at March 31 of R1.168bn (plus another R2.025bn on call from repurchase agreements‚ and free cash flow for the 12 months ended in September 2011 of R3.196bn‚ the fine payments and capex will erode the company’s liquidity and increase leverage‚” Rowlings said.

The ratings agency estimated paying the total fine would add pressure on the ratio of net debt to earnings before interest‚ depreciation‚ taxes‚ and amortisation (ebidta).

“Management’s ability to stabilise the continuing downward trajectory of Telkom’s ebidta margin and interest coverage will be an important measure of the effectiveness of its turnaround strategy‚” Rowlings said.

Telkom‚ Moody’s noted‚ had struggled to stabilise its business amid revenue losses and margin compression owing to intensifying competition and customers abandoning the company’s higher-margin‚ fixed-line services for mobile services.

The government’s rejection of a proposal by KT Corporation to buy a 20% stake in Telkom would not make things easier for Telkom‚ Moody’s noted.

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