ODD COUPLE TELKOM AND VODACOM MAY PART

Mergers, Acquisitions and Financial Results

Telkom and Vodacom are sending out signals that their long and often fiery relationship is coming to an end, with Telkom looking likely to sell its 50% stake to Vodacom's other joint shareholder, Vodafone.

Telkom and UK-based Vodafone are uneasy bedfellows, always circling for an opportunity to buy the other out. But neither has budged, suspending all three operators in a largely unworkable stalemate. Now Telkom is understood to be buckling, and could pocket R70bn for its stake.

The question is what Telkom would do with that cash, and if that remains unresolved a potential deal may be scuppered."It's a dysfunctional relationship," said an analyst. "A lot of money could go to shareholders." Another analyst said a sellout looked increasingly probable. "The question is what are they going to buy because they need a mobile strategy."

Speculation about which investor would succumb first has entertained the market for years, but yesterday Telkom and Vodacom both hinted at definite changes as they announced their financial results.

Acting CEO Reuben September said Telkom was reviewing its Vodacom investment. "Since the process of review isn't complete I'm not at liberty to share the details but we will come to the market once we have concluded."

A Vodacom source said: "Things are moving quite quickly. The upside for Telkom is that it frees them to do mobile anywhere in Africa themselves and unlocks a lot of shareholder value."

Telkom has a market cap of R90bn with its stake in Vodacom accounting for R60bn, giving Telkom the credit for just R30bn of its own value. "Telkom is clearly worth more than that so it would get a really good jump-start, but walking away does have its downside," the source said.

The downside is that shedding Vodacom would slash its figures as Vodacom accounts for 37% of Telkom's revenue and 28% of net profit. But the massive cash injection could be used to build up fresh cellular operations in a more workable format.

Telkom's growth depends on teaming up with a mobile operator to expand into Africa with a full range of voice, data and internet services. "For Telkom, a good mobile investment must translate into a good mobile partner for geographic expansion," said September.

But Vodacom has proved a reluctant partner too often to pretend it is the ideal match. When Telkom bid for Nigeria's state-owned operator Nitel, Vodacom refused to support it and demanded a management fee for its services.

Other options may be to buy one of the dozens of cellular operators active in Africa, or to buy a rival telecoms player in SA and grow its cellular skills. A third option -- and one mentioned by September -- is to work with existing mobile operators as it enters different countries.

September said Telkom still viewed Vodacom as its preferred partner, "so to indicate that we will reach the end game with or without Vodacom would be absolutely premature. We want to look at all our options, and make sure we arrive at the best fit for Telkom."

In May, Citigroup said it expected Vodafone to buy the rest of Vodacom for R73,4bn, but Vodafone CEO Arun Sarin declined to comment. The British operator is anxious to strengthen its stance in emerging markets, with analysts applauding that as essential to avoid a terminal decline as European markets reach saturation.

Business Day