Vodafone digs in over challenge for Vodacom

Vodafone is driving a hard bargain amid talks over a £5bn buyout of the South African mobile phone operator Vodacom and could yet decide to take a controlling stake in the company rather than pursuing a full acquisition.

Vodafone already owns a 50 per cent stake in Vodacom, with the other half owned by South Africa's incumbent telecoms company Telkom, in which the South African government still owns a 38 per cent stake. Telkom launched a review of its mobile strategy around three months ago which prompted Vodafone to enter talks with its South African partner over buying out the stake. Vodafone, which upped its stake in Vodacom from 35 per cent last year, has the first right of refusal over the purchase of Tel-kom's Vodacom holding.

Analysts have valued Telkom's half share of Vodacom at more than £5bn but Vodafone is thought to be unwilling to match that valuation and could instead look to raise its holding to take a controlling stake in the operator. Arun Sarin, the chief executive of Vodafone, has openly expressed his desire to buy out its South African partner but is determined not to pay over the odds for the mobile operator. Talks between Vodafone and Telkom are said to be at an early stage.

Vodafone has looked to target high-growth emerging market assets to offset the impact of higher regulation and price pressure in mature European markets such as the UK and Germany. Earlier this year, the company completed a £5.6bn buyout of India's fourth-largest mobile phone company Hutchison Essar, and it has also invested significant sums in purchasing operators in Turkey and Egypt while simultaneously cutting costs in Europe.

Vodacom is an attractive asset for Vodafone as it provides it with a springboard for growth in markets across sub-Saharan Africa. The company is the largest operator in South Africa with around 30 million users and a market share of almost 60 per cent and it also has a substantial presence in Tanzania, the Democratic Republic of Congo, Moz-ambique and Lesotho. Mob-ile phone growth is expected to boom across Africa due to the lack of fixed-line telecoms infrastructure and the increasing availability of very cheap handsets.

Despite Vodafone being a natural buyer for the Telkom stake, Mr Sarin appears determined not to overpay for the company. Vodafone recently pulled out of the auction to buy the Spanish internet service provider Ya.com after being outbid by Orange for the asset.

The British mobile phone company could also face competition for Telkom's stake in Vodacom. MTN, a pan-African and Middle Eastern telecoms company based in South Africa, is reportedly interested in acquiring Telkom's fixed-line assets, which potent-ially complicates a deal over the Vodacom stake.

Telkom will hold a board meeting next month to consider its options, including any bid Vodafone makes for Vodacom. Analysts expect that the two companies will probably thrash out a deal over the coming month.