Telkom's fine hurts but civil claims may hurt more

The tribunal fined Telkom last week‚ but the fine was well below the Competition Commission's recommended R3,2-billion.

"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 judgement‚ would result in the company paying R22,5-million in the next six months‚ and another R224,5-millionm in 18 months.

Telkom plans to spend R7,5-billion in capital expenditure in the next financial year.

"With a cash balance at March 31 of R1,168-billion (plus another R2,025-billion on call from repurchase agreements)‚ and free cash flow for the 12 months ended in September 2011 of R3,196-billion‚ 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.

Meanwhile, the Competition Tribunal's fine opens up the potential for lawsuits from Internet service providers who were affected by the company's practice‚ experts say.

Chris Charter‚ director‚ competition at Cliffe Dekker Hofmeyr‚ said although the fine was lower than the proposed penalty of between R1-billion and R3,2-billion suggested by the commission‚ Telkom "should also be concerned about the prospect of civil damages claims" from VANS operators whose businesses were negatively affected by the conduct‚ as well as VANS customers in turn.

The tribunal stated that such customers paid significantly more for VANS services than would have been the case. "For this reason alone‚ Telkom may well look to appeal to the Competition Appeal Court and beyond‚" said Charter.

Marc Furman‚ the co-chairman of the Internet Service Providers Association (ISPA)‚ said the organisation was currently studying the judgement in detail and the outcome of this scrutiny would determine what further action‚ if any‚ might be necessary.

Furman said although the matter related to the period 1999-2004 the decision was "very much relevant" to today's market‚ which remained characterised by‚ among other things‚ anti-competitive pricing. "The decision will hopefully have an indirectly positive impact on the consumer by drawing a clear line around conduct which violates South Africa's Competition Act‚" he said.