If Korea’s KT Corp (formerly Korea Telecom) were to take a 20% stake in Telkom, it would on balance be a positive development for the JSE-listed telecommunications operator, analysts polled by TechCentral said on Friday.

Telkom told shareholders on Friday morning before the markets opened that it was in discussions with KT about a “potential strategic venture” that, if implemented, would result in the Korean company buying a “strategic equity shareholding” of 20% (excluding shares reserved for employee share schemes).

Telkom said the companies were entering long-term agreements to formalise the relationship and identifying areas of mutual strategic and business cooperation.

At lunchtime, Telkom’s share price was trading sharply higher, up nearly 6% over Thursday’s close.

Denis Smit, MD of technology research and consulting firm BMI-TechKnowledge, says KT would bring “vast intellectual property to Telkom in terms of media, content and Internet Protocol networks”.

The deal, if it were to happen, makes “compelling commercial sense” and could help Telkom build fibre-to-the-home (FTTH) networks in SA. KT is a world leader in building FTTH infrastructure, having deployed ultra-fast broadband to millions of Korean homes at speeds of up to 1Gbit/s.

Telkom is largely reliant on an ageing copper-wire access network and many analysts believe it is only a matter of time before it begins to turn its attention to building fibre access infrastructure to replace its legacy investments.

However, any deal will be complicated by government’s shareholding in the company, Smit warns. Government directly holds nearly 40% of Telkom’s equity and has said previously that it is not keen to sell its stake because it views the investment as strategic. Stock market analysts and many investors have long argued that government should disinvest from the company now that the market has been liberalised and opened to competition.

In terms of the potential deal, if it happens, Telkom will issue new ordinary shares at an issue price of R36,06/share. This will dilute other shareholders’ positions, including government’s, pushing the state’s direct holding down from about 40% to about 32%. Government also has an indirect stake in the fixed-line operator through its pension fund administrator, the PIC. Together, these investments mean government currently owns just over 50% of Telkom.

“This deal would be politically very difficult,” Smit says. “It will have a big impact on government’s position in the company, though it could still be in government’s interests financially.”

From a technology perspective, the deal would make perfect sense, Smit adds. “It’s the mechanism of the deal that is the fascinating part.”

Irnest Kaplan, MD of Kaplan Equity Analysts, says he is not sure what the motivation might be for KT buying a “relatively small stake” in a company that is still effectively controlled by government. It’s possible, he says, that KT regards Telkom as a springboard into the rest of the African continent.

Despite Telkom’s spectacular failure in Nigeria with its Multi-Links investment, government is still keen for the company to expand on the continent. It’s possible the Koreans have made promises to government that they will help facilitate Telkom’s growth aspirations north of the border.

But big challenges remain if the deal were to go ahead. Telkom, Kaplan says, remains overstaffed and needs to cut jobs. “If government were to sell its entire stake to KT and KT was coming in with a good-sized investment and didn’t have government as a shareholder, it could be a good transaction.”

Kaplan speculates that government may have had a “change of heart” over its exposure to Telkom and may now be willing to “take more of a backseat role because the market is opening up” to competition. “But government should get out entirely,” he says.

On balance, he believes any deal would be positive. “Korea is a fibre-rich country and that bodes well for Telkom,” he says. — Duncan McLeod, TechCentral