South Africa Said to Favor Vodacom Sale in Eskom Bailout

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South Africa will probably first sell its stake in a Vodafone Group Plc unit as it disposes of state assets to raise funds for power plants needed to stoke economic growth, five people familiar with the matter said.

The government owns 13.9 percent of Vodafone-controlled Vodacom Group Ltd., worth about 28 billion rand ($2.4 billion) at its current share price. The state doesn’t deem the stake as strategic because of its size and a sale will probably not face opposition from labor unions, said the people, who include bankers and a person familiar with the government’s thinking, asking not to be identified because the deliberations are private. South Africa also owns 39.8 percent of fixed-line phone company Telkom SA SOC Ltd.

South African Finance Minister Nhlanhla Nene said in September that the government will sell assets so it can give state power utility Eskom Holdings SOC Ltd. 20 billion rand in assistance and increase guarantees of its bonds. The electricity provider is facing a 225 billion-rand funding shortfall as it builds power plants to try and keep pace with demand and end a program of rolling blackouts.

The first cash injection of 10 billion rand will be expected by about June, Nene told Bloomberg TV Africa in a Jan. 22 interview. While the Treasury has yet to appoint financial advisers for asset sales it has gauged the opinion of bankers on the planned sale, the bankers said.

Vodafone Reluctant

Vodacom pared an earlier gain of 1 percent and traded 0.4 percent lower at 133.86 rand at the close in Johannesburg. The stock has advanced 4.2 percent this year, compared with a 3.3 percent increase on the FTSE/JSE Africa All Share Index.

The country could raise more than 86 billion rand from the sale of publicly traded assets as well as real estate, Barclays Plc said in a research note Jan. 13. This includes assets owned by the Industrial Development Corp., such as shares of Sasol Ltd. and Kumba Iron Ore Ltd.

“The IDC is a state equity that runs government’s agenda in terms of investment and assisting the economic development,” Nene said in a Jan. 30 interview. “We are talking to all departments where there might be state-owned equity,” he said, declining to comment further.

The IDC has previously said that they have no plans to sell the stakes.

Vodafone, which owns 65 percent of Vodacom, is reluctant to buy the government’s stake in the phone company because it’s comfortable with its holding, according to two people with knowledge of the situation, who asked not to be identified because the company hasn’t made a public comment. Vodafone spokesman Ben Padovan declined to comment.

Telkom, SAA

Telkom would be a difficult asset for the government to sell as a transaction would probably face opposition from labor unions as the company is already trying to cut jobs, the bankers said. A transaction could also be opposed by antitrust regulators, they said.

MTN Group Ltd., Africa’s largest wireless operator, has considered taking a stake in Telkom, according to three people familiar with the negotiations. Jacqui O’Sullivan, a spokeswoman for Telkom, wasn’t immediately available for comment. Telkom shares gained 0.2 percent to 69.85 rand, while MTN rose 1.7 percent to 205.58 rand.

The country’s last major asset sale was in March 2003, when it sold 25 percent of Telkom for 3.9 billion rand. The government disposed of 20 percent of South African Airways to Swissair in 1999 and bought it back in 2002 when the European carrier went bankrupt.

Downgrade Risks

SAA, which announced losses of 2.5 billion rand and the cancellation of its Beijing route on Jan. 30, may also be sold with the carrier in preliminary talks with China-based airlines about acquiring an equity stake, according to a separate person familiar with the matter. Tlali Tlali, a spokesman for South African Airways, declined to comment.

The risk of downgrades to Eskom and South Africa’s credit ratings is “escalating” because the state has yet to act on its plan to sell assets, Adrian Saville, founder of Cannon Asset Managers, said by phone today. Money is “being spent on the public sector headcount and the public sector wage bill” instead of infrastructure, he said. “It’s politically expedient and at some point the chickens are going to come home to roost.”

If parent Vodafone doesn’t want to increase its Vodacom stake, pension funds and sovereign wealth funds may make good buyers, according to Saville. “These are investors that wouldn’t be obsessed with control,” he said.