(Adds details, updates Blue Label response, shares)
JOHANNESBURG, Nov 15 (Reuters) - South Africa’s Telkom SA said on Friday it was in talks about a potential takeover of Cell C, the country’s third biggest mobile carrier, hitting shares in Cell C majority shareholder Blue Label Telecoms.
Cell C has been grappling with hefty debts while Telkom, the fourth biggest carrier and 40% owned by the state, is also struggling with an increasingly costly debt burden.
Telkom said this week that it was in discussions about a potential acquisition without disclosing its target.
Its shares rose 1% after the announcement while shares in Blue Label Telecoms, which said its board had not been formally apprised of any details of Telkom’s proposal, slumped more than 7% before paring their losses.
Telkom has tried in the past to acquire its troubled rival.
A deal would create an entity with around 27 million active subscribers, but Telkom said in its statement on Friday that it would only go ahead if Cell C makes a number of changes.
“The potential acquisition will be subject to Cell C completing a financial restructuring to ensure that its gearing levels are reduced to a sustainable level as specified by Telkom,” it said.
Telkom will also require Cell C to renegotiate a number of contractual relationships to terms it finds acceptable, it said, adding while due diligence was largely concluded, discussions were preliminary and any takeover would be subject to regulatory approvals.
A purchase of Cell C would advance Telkom’s strategy to gear its operation towards newer technologies like mobile and fibre, a move that has delivered growth but also higher debts that have proven costly and hurt profits.
Cell C, whose debt pile stands at just shy of 9 billion rand ($605 million), said it received a non-binding offer from Telkom, but “remains focused” on its turnaround including driving efficiencies, restructuring its balance sheet and improving liquidity.
The company, which has struggled to compete with bigger rivals MTN and Vodacom, added that constructive discussions on a planned recapitalisation of Cell C were ongoing with lenders and other stakeholders.
Blue Label purchased its stake in Cell C for 5.5 billion rand in 2016 and has had to defend the decision to concerned investors since. It said in February a consortium had agreed to purchase a minority stake in Cell C, subject to certain conditions.
The company is also in talks with MTN about an extended national roaming agreement that Blue Label said was mutually beneficial and would result in substantial cost savings for Cell C.
$1 = 14.8839 rand Reporting by Emma Rumney; editing by Emelia Sithole-Matarise and Jason Neely