Rating agency Moody's Investors Service has placed the Global Scale senior unsecured issuer rating of A3 and the NSR LT issuer rating of Aa3.za of Telkom under review for possible downgrade, Moody's said on Tuesday.

The action follows Telkom's announcement last week of the sale of its 15 percent stake in mobile operator, Vodacom Group to Vodafone Group plc. The proceeds are expected to be R22.5-billion less the attributable net debt of Vodacom at the time of signature, and will be settled in cash.

The proposed transaction remains subject to certain conditions, inter alia, Telkom unbundling its remaining 35 percent stake in Vodacom to its shareholders, through a listing of Vodacom on the JSE. Approval from both the Telkom board and the South African Government has been secured.

"The rating impact of this disposal is vitally dependent on the final use of proceeds. At this stage, Telkom has not made any public comment about the use of disposal proceeds, nor indicated its likely future strategy with respect to its mobile business," Moody's said.

The rating agency noted that Telkom's stake in Vodacom is a key operational and financial asset of the Telkom Group, and Moody's will assess the interplay between the to-be-determined capital structure of the new Telkom and its business strategy - specifically with respect to fixed and mobile expansion – in assessing the credit quality of Telkom after the disposal process has been formalised.

Further factors to consider are an increasingly competitive environment, with the fixed-line business already under price and volume pressure, coupled with an expectation of weakening credit metrics over the next 12-24 months, as Telkom requires funding for its capex and investment programme.

Moody's review process will focus on the financial implications on Telkom's baseline credit assessment of the disposal of its 15 percent stake in Vodacom and the unbundling of a further 35 percent to its shareholders.

Telkom's BCA is currently in the range of 8-10 (on a scale of 1-21, where 1 represents the lowest level of credit risk).

Telkom is an integrated communications group with fixed and - until the sale of its Vodacom stake - mobile telecommunications services in South Africa and other African countries. For the fiscal year ended 31 March 2008, the company generated sales of R56-billion and EBITDA of R20-billion. Market capitalisation as at that date was R68-billion.

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