Mergers, Acquisitions and Financial Results

  Telkom posted a 10,6% rise in first-half earnings today - at the top end of forecasts - and said a pact blocking its cellphone unit Vodacom from expanding in Africa had been lifted. Telkom said headline earnings per share - which strips out certain capital, non-trading and one-off items - rose 10,6% to 874,7 cents in the six months to end September. Seven analysts polled by Reuters forecast headline earnings per share of 836 cents, with forecasts ranging from 790 to 909 cents.

Telkom said the UK's Vodafone Group had agreed to allow the companies' jointly owned South African cellphone unit Vodacom to expand anywhere in Africa except Kenya and Egypt, relaxing a shareholder pact that has hamstrung Vodacom's growth.

Profit growth at Telkom is slowing as revenues from its core fixed-line service shrink and rampant growth in SA's cellphone sector also starts to lose steam, leaving investors wondering where growth will come from.

Vodacom has also missed out on a scramble for high-growth African cellphone assets led by local rival MTN, so analysts said news it could now muscle into new markets was very positive for the company, and for shareholder Telkom.

"The results are pretty much in line with expectations at the operating level, although slightly better on headline earnings per share," said one Johannesburg-based analyst. "That's very positive on Vodacom and Vodafone," he said.

Telkom shares have gained 7,6% so far this year, lagging a 30% rise by the Johannesburg Top-40 index of blue-chips, due to murky growth prospects. The stock trades at about 8,6 times this year's forecast earnings according to Reuters data, while MTN trades at about 12,6 times.

Telkom CE Papi Molotsane told a conference call fixed-line revenues would probably fall in the second half of the year versus the first half as tariff cuts bite, although that would be partly offset by stronger sales at Vodacom. He declined to say whether headline profit would keep rising.

Telkom said it expected its full-year fixed-line EBITDA (earnings before interest, tax, depreciation and amortisation) margin to come in at the top end or slightly above guidance of 37-40%. Group EBITDA margin fell to 40,7% in the first half from 44,5% in the year-ago period.

Molotsane reiterated Telkom wanted to expand in Africa, adding the company would focus on data and on joint fixed and cellphone opportunities with Vodacom. He said Telkom was conducting due diligence on a number of possible acquisition targets on the continent but declined to give details.

Telkom said Vodacom was the main profit driver in the first half, with subscribers up 35% to 25,9 million, while net profit rose 30,4% to R3,1bn.

Vodacom's customer base in its key home market - which is maturing fast with only two more years of strong growth expected - rose 28,1% to 20,2 million, well ahead of its nearest rival MTN, which has 11,16-million customers in SA.

MTN remains the biggest operator in sub-Saharan Africa with 34,8-million subscribers thanks to its recent acquisition of Investcom and bumper growth in Nigeria. Telkom said operating revenue rose 7,3% to R25,147bn.

Business Day