JOHANNESBURG, Nov 15 (Reuters) - South Africa's Telkom SA TKGJ.J said on Friday it is in talks over a potential takeover of Cell C, the country's third biggest mobile carrier that has been grappling with hefty debts.
Telkom, which is 40% owned by the state and is itself struggling with an increasingly costly debt burden, said earlier this week that it was in discussions about a potential acquisition without disclosing its target. shares rose following the announcement to trade 2.8% higher by 0859 GMT, while those of Cell C's majority owner Blue Label Telecoms BLUJ.J slumped more than 7%.
Telkom has previously looked at acquiring its rival, and said in its statement on Friday that it would only go for the deal 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.
Cell C confirmed in a statement that it had received a non-binding offer from Telkom, but said it "remains focused" on its turnaround including driving efficiencies, restructuring its balance sheet and improving liquidity.
The company, which has been deep in debt for years and struggled to compete with bigger rivals MTN MTNJ.J and Vodacom VODJ.J , added that constructive discussions on Cell C's recapitalisation were ongoing with lenders and other stakeholders.
A Blue Label spokeswoman declined to comment.
Blue Label, as well as another Cell C shareholder Net1 UEPS Technologies UEPS.O , in September wrote down the value of their investments in the carrier to zero, though Net1 said it believed that with recapitalisation Cell C's long-term prospects would significantly improve.
Telkom said on Tuesday that a spike in debt costs had pushed its half-year profits down by more than a third after it invested heavily to overhaul its offering towards newer technologies like mobile and fibre, now central to its growth.
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