KT Corp. May Reduce Telkom South Africa or Abandon Offer as Share Declines

KT Corp. (030200) may cut the price of an offer to buy a stake in Telkom South Africa Ltd. (TKG) or abandon the 3.8 billion rand ($505 million) transaction, Absa Asset Management and MMI Asset Management said.

Telkom, Africa’s largest fixed-line phone company, and South Korea’s largest phone and Internet company, said on Oct. 14 that Seongnam-based KT offered 36.06 rand a share for 20 percent of Pretoria-based Telkom. Telkom has dropped more than a fifth to its lowest in eight years since announcing the talks as it faces an antitrust fine of as much as 3.25 billion rand.

“The market is bracing itself for maximum damage,” Chris Gilmour, who helps manage the equivalent of $1 billion at Johannesburg-based Absa Asset Management, said by phone yesterday. The money manager doesn’t own Telkom stock. KT “might want to reduce the price and even opt out of the deal.”

Telkom needs a partner to fight increasing competition that has cut profit excluding one-time items every year since 2006 while a deal provides a growth opportunity in Africa for KT. Telkom and KT declined to comment to e-mailed requests for comment from Bloomberg News. The companies are exploring areas of strategic and business cooperation, Telkom said on Jan. 27.

State Control

The Public Investment Corp., the state-owned South African money manager and Telkom’s second-largest shareholder with 10.9 percent, said on Oct. 18 it supports the deal. South Africa’s government owns a further 39.8 percent of Telkom.

“The declining Telkom share indicates the market doesn’t think KT will pay the full price,” Wayne McCurrie, a fund manager at Johannesburg-based MMI Asset Management (MMI), said on Feb. 27. MMI holds 227,000 shares, or less than 0.1 percent of Telkom, according to data compiled by Bloomberg.

Telkom is facing charges of abuse of market dominance and anti-competitive practice by charging excessive prices for services to other industry participants before the Pretoria- based Competition Tribunal. The company has denied the charges at hearings started in 2009.

“It is highly improbable KT would cancel the deal simply because of a lower share price,” Chantel Lindeman, head of ICT Africa at Frost & Sullivan in Cape Town, said today. “That would be very short-sighted.”

‘Admission of Guilt’

The Competition Commission, which makes recommendations to the Competition Tribunal, asked for the maximum fine of 10 percent of Telkom’s annual revenue. While denying the charges, Telkom said in closing arguments at hearings during the second week of February that an appropriate fine would be 27.3 million rand, according to transcripts e-mailed by the Competition Tribunal. Judgment on the matter is pending.

“That Telkom offered to pay a certain amount of the fine can be seen as an implicit admission of guilt,” said Khulekani Dlamini, head of research at Cape Town-based Afena Capital, which manages 18 billion rand and doesn’t own Telkom stock.

Telkom needs the deal to break the state’s grip, he said. Under the proposed transaction, Telkom will sell new shares to KT, diluting existing shareholders, while jobs won’t be cut .

“Controlled by the government, this is not a company with a lot of flexibility,” said Dlamini. “It can’t get rid of things and employees it no longer needs.”

Maximum caution

Telkom dropped 2 percent to 25.84 rand at the close in Johannesburg, its lowest since Nov. 5, 2003. The fall extended its decline this year to 11 percent. Vodacom Group Ltd. (VOD), the largest provider of mobile services to South Africans, has gained 16 percent. Telkom in 2010 started its 8ta mobile-phone company after selling its controlling Vodacom stake to Vodafone Group Plc. (VOD)

“The share share has been falling under the weight of the many negative permutations around the company, including the possibility that the Koreans can pull out, which would be a sign of a lack of confidence,” said Dlamini. The outlook for earnings isn’t improving even though Telkom controls most of the South African fixed-line market, he said.

While there’s “a price for everything,” investors must exercise “maximum caution” when considering an investment in Telkom, said Absa Asset Management’s Gilmour. “It would be safer to stand on the sidelines and let the antitrust matter run its course.”

To contact the reporter on this story: Sikonathi Mantshantsha in Johannesburg at smantshantsh@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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