Telkom fine opens up potential lawsuits

The tribunal last week fined Telkom R449m after it found it guilty of abusing its dominance by refusing to grant rival value added network service (VANS) providers with access to its facilities‚ which were essential for rendering these types of services.

The fine is expected to harm Telkom's 2013 earnings. Ratings agency Moody's warned on Monday that the fine was credit negative as it would reduce cash flow and increase leverage for fiscal years ending March 2013 and 2014.

Chris Charter‚ director‚ competition at Cliffe Dekker Hofmeyr‚ said although the fine was lower than the proposed penalty of between R1billion and R3.2bn 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 absent Telkom's abuse. "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 judgment in detail and the outcome of this scrutiny would determine what further action‚ if any‚ might be necessary.

"It is also open to Telkom to take the matter on appeal‚ while some of those who were affected by Telkom's behaviour may consider using this decision as the basis upon which to sue Telkom for damages‚" he said.

The tribunal found Telkom guilty of refusing to supply facilities to ISPA members and of trying to induce its customers not to deal with Telkom's competitors. Telkom's behaviour was described as "bullying". "For the ISPA the important thing is the precedent that has been set. The competition authorities have conclusively found that Telkom did behave unlawfully over a long period of time‚ abusing its statutory monopoly‚" he said.

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 SA's Competition Act‚" he said.

Douglas Rowlings‚ associate analyst at Moody's‚ said the penalty also came amid a depressed operating performance over the past 12 months.

The ratings agency estimated paying the total fine would add pressure to 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‚" said Rowlings.

He said: "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."

Charter says it was "interesting to note" that the tribunal laid some of the blame for the travails that beset the VANS providers at the door of the regulator the Independent Communications Authority of South Africa (ICASA) and before that‚ the South African Telecommunications Regulatory Authority and the Minister of Communications. "The regulatory framework was allowed to stagnate due to inaction and poor enforcement and the resultant uncertainty left Telkom with sufficient wiggle-room to preserve its position‚" he said.

The tribunal also lamented the "clear conflict of interest suffered" by the minister in being both in charge of telecoms liberalisation as well as being a major shareholder in Telkom‚ Charter said. He believed that the latter fact led Telkom to believe that it was entitled to protection‚ emboldening it to act as it did. "These circumstances were treated as mitigating factors and led to a 30% discount off the fine that might otherwise have been imposed (could have been R642m)‚" he said.