S.Africa's Telkom in deal talks despite plunging profit

South Africa's Telkom SA said on Tuesday it was in discussions over a potential acquisition even as a spike in debt costs pushed half-year profits down by more than a third.

The company, 40% owned by the state, has been investing heavily in its mobile business to drive growth, but also adding to a debt burden.

Telkom said in a stock exchange announcement on Tuesday it was in discussions in relation to a potential acquisition - one move that it has previously warned could cause push debt up further.

"We are always on the lookout for the right asset at the right price," CEO Sipho Maseko told Reuters by phone.

The company had previously looked at Cell C, South Africa's third largest mobile operator with its own financial problems, and would only consider it within a disciplined financial framework, he said.

Amid a drop in fixed-line customers, Telkom has ploughed funds into areas such as mobile and fibre.

Like other African telecoms firms, it is trying to keep pace with a surge in demand for the internet and data with growing smart phone usage.

"We have taken a view growth in data will continue unabated," Maseko said, adding that pouring more "jet fuel" onto Telkom's mobile and fibre business had paid off.

Its mobile division posted revenue growth of almost 57% in the six months to Sept. 30.

But the hefty funding it took to shift Telkom's focus to newer technologies wiped out its free cash flow, pushed its net debt to EBITDA ratio beyond previous guidance, and pulled profits down.

The ratio rose to 1.4 from 0.8 at end-March, the end of the company's financial year, though adopting a new accounting standard since then caused part of the rise.

Telkom shares were flat at 0703 GMT. The stock took a beating earlier in November when it warned finance costs could pull profits down by as much as 40%.

Headline earnings per share, the main profit measure in South Africa, stood at 183.4 cents for the period, down from 288 cents a year earlier.

That was a fall of 44% compared to a restated figure for the first half of 2018.

While the company declared an interim dividend of 71.5 cents per share, it warned its capital requirements were likely to impact its dividend policy.

"In considering the dividend policy we will prioritise our capital investment program, maintain an investment grade credit rating and consider our cash position," its statement said.

($1 = 14.8839 rand)

(Reporting by Emma Rumney; editing by Shailesh Kuber and Jason Neely)