The sharp decline in Tekom’s share price in recent months could pose a challenge for it in its talks with KT Corp to sell 20% of its equity to the Korean telecommunications firm.

Telkom’s share price has fallen significantly in recent months because of disappointing financial results and, more recently, because of investor concerns that it could be forced by the Competition Tribunal to cough up a large fine for alleged anticompetitive behaviour dating back to the early part of the last decade.

The fall in Telkom’s share price is sparking debate about whether KT Corp will revise its mooted R36/share offer to buy a minority stake in the company. There are concerns KT will want to renegotiate any offer price because of the slump in Telkom’s share price since the talks were first announced.

Telkom closed at R27,05/share on Thursday after touching a new multi-year low in intraday trade. In the past year, the share has declined by almost 22%.

Irnest Kaplan, MD of Kaplan Equity Analysts, says he isn’t sure what KT Corp’s rationale is in pursuing the deal in the first place. “One of the questions is why it’s taking only 20%,” he says. With that sort of investment, it will exercise little control over Telkom.

Kaplan says he thinks the Korean company wants to get its “feet wet” in the African market but doesn’t yet want a “full swim”.

He suggests the move is perhaps part of a longer-term plan, with Telkom as an entry point into the continent. “If there is a long-term strategy, then a share price of R36/share doesn’t make that much of a difference.”

Nevertheless, Kaplan says it’s hard to predict how KT Corp will react to Telkom’s falling share price and the potential fine it faces from the Competition Tribunal. Whether the deal goes ahead, or whether its terms are altered dramatically, Kaplan says an announcement from both parties is probably imminent.

“Without something like a management contract [for KT Corp], it’s a small stake,” says Kaplan. “It’s probably just a mutually beneficial move. KT can see if it wants to take this further and Telkom gets some insight and expertise into what KT has done [in Korea], even though the Korean market is very different to SA’s.”

Kaplan says the recent decline in Telkom’s share price positions KT Corp more strongly and will help it negotiate good terms if it wants to.

Another analyst, who declined to be named because he has to work closely with Telkom, says it’s important to remember that the mooted R36/share offer for the stake in the company is not binding, but rather a preliminary figure that was “thrown around”. In additional, some sort of management contract for KT Corp, where it extracts fees, seems “very likely”.

The analyst adds that KT Corp may subsequently get involved elsewhere in Africa “in other disorganised fixed-line operators”, and may understand clearly the importance of fixed-line networks for mobile operators requiring backhaul from their base stations — a big opportunity.

KT Corp will probably offer closer to R32/share, the analyst says, adding that this might incur resistance from shareholders, some of whom may argue that Telkom’s recent share price decline is insufficient grounds for that sort of valuation. — Craig Wilson, TechCentral