Telkom knock could hit R1bn

By Nicola Mawson for Telkom

Johannesburg, 05 Dec 2006

A research report by analyst firm Merrill Lynch indicates Telkom's liability after losing a recent court case could be anywhere between R325 million and R1 billion.

In November, the SA Supreme Court of Appeal upheld an appeal by Delaware-based software company Telcordia Technologies against a November 2003 ruling by the High Court in favour of Telkom.

The High Court ruling had set aside a September 2002 international arbitration award in favour of Telcordia. The company had sought damages of $130 million (about R925.6 million) and interest at 15.5% a year as a result of Telkom's cancellation of a contract in 2001.

Merrill Lynch says the potential impact to Telkom could be anywhere between Telkom's previously provided for R325 million and R1 billion, based on Telcordia's original claim.

While the matter is still subject to arbitration and Merrill Lynch does not expect any clarity on the matter until next year, the firm points out that Telkom has failed to make a provision in the case of a loss.

No provision

Telkom reversed the R325 million provision for the liability during its 2004 financial year and had no specific provision in its 2006 financial results. "Therefore, we think the final settlement should impact negatively on Telkom's earnings, cash flow and gearing."

In addition, says the firm, the five-year battle and ongoing uncertainty about any potential liability "is likely to continue to weigh on the Telkom share price". Shortly after the ruling, Telkom lost R2.8 billion in market capitalisation.

Other analysts say the maximum Telkom could be expected to fork out is between R1.5 billion and R2 billion if compound annual interest is added to the original figure at the claimed rate. At R2 billion, this would amount to about R3.60 a share.

However, analysts say Telkom is unlikely to have to pay this figure. One analyst says this is an absolute worst-case scenario, as Telkom has counter-claims against Telcordia.

Another analyst says the figure may be around R700 million, which he does not believe will impact the company's future profitability. Instead, this could reduce the company's net asset value by the final award amount, which Merrill Lynch says should be known by the end of the first half of next year.

However, Telkom could have mitigated its losses, as yesterday it was revealed that Telcordia previously offered to settle the matter in exchange for about $50 million (R360 million).

Telkom's share has recovered since the ruling, when it dropped to close at R130 on 22 November, and yesterday closed at R135.90.