By Helen Nyambura-Mwaura
JOHANNESBURG (Reuters) - The future of South African telecommunications firm Telkom <TKGJ.J> may depend on whether the left-leaning ruling African National Congress (ANC) trusts government more to build out internet infrastructure than the private sector.
In a country with one of the world's highest ratios of income disparity, the ANC has argued that companies trying to maximize profits could overlook the millions of poor lacking services - including broadband internet connections.
The party and its labor allies in the recent months have tried to thwart some high-profile foreign acquisitions of stakes in local firms, saying the moves could lead to job cuts in a country battling chronic unemployment.
But on paper, Telkom had a nearly perfect partner to increase connectivity in Africa's biggest economy in South Korea's KT Corp. <030200.KS>, a fixed-line operator embracing mobile technology and looking to acquire a 20 percent stake.
KT helped turn South Korea into the world's most wired country with more than 90 percent of households having broadband internet connection.
"The government is schizophrenic because on one hand, it is a shareholder in Telkom, so it wants Telkom to maximize its profit because it gains as a shareholder but also from the tax base," said Dobek Pater, a telecoms analyst at consultancy Africa Analysis.
"On the other hand, it still views Telkom as a vehicle to achieve part of its information technology policy, one of the critical vehicles to drive that policy forward."
The ANC holds a major policy meeting next week and has said in planning documents it wants greater government control of the economy and to spend tens of billions of dollars on infrastructure to spur growth, increase employment and alleviate poverty.
Telkom shares tumbled to an eight-year low this month after the government blocked KT's plans to acquire the 20 percent stake.
"Cabinet didn't support the transaction," Minister in the Presidency Collins Chabane told reporters. He did not offer an explanation but others officials said the deal could compromise Telkom's position as "a strategic asset."
The government owns more than a majority stake jointly with the state-run pension fund. The deal with the South Korean firm would have diluted the holding to less than 50 percent.
But shares jumped this week on a report the ANC would consider nationalizing Telkom at its policy meeting and placing the internet build-up in its infrastructure plans.
"Government's got a lot of influence on this economy already. They obviously think they are better placed to roll out the Telkom infrastructure across the country better than anyone else," said Sasha Naryshkine, an analyst at Vestact.
But state-run companies such as logistics groups Transnet and airline South African Airways have been struggling for years with massive debt and management troubles, requiring tariff hikes or cash injections to remain afloat.
"The ANC isn't suspicious of private business per se, but it thinks the state is better placed to drive development and empowerment," said Peter Attard Montalto, an emerging market economist at Nomura.
"Government already has very hefty influence over Telkom and wouldn't need to nationalize it to obtain policy objectives."
South Africa has placed hurdles in the way of past mergers.
Talks between MTN <MTNJ.J> and India's Bharti Airtel <BRTI.NS> for a $24 billion merger that would have formed the world's third-largest operator fell through when Pretoria intervened to block the deal, preferring the flagship corporate kept its national character.
Japan's Kansai Paint <4613.T> and the U.S. retailer Wal-Mart <WMT.N> have both faced conditions in their bids for local companies.
Analysts say the government's repeated meddling in the cross-border deals could tarnish its reputation among global investors as being open to foreign investment.
ANC-controlled governments have reassured investors that taking ownership of private companies is not part of its policy. It has also reassured its supporters it would not back moves leading to job cuts.
Telkom employs about 23,000 people but only needs about half of that, Pater of Africa Analysis said, adding KT would probably want to cut a bloated workforce.
Internet penetration is 17 percent in South Africa, lower than rivals on the continent including Nigeria at 29 percent and Kenya at 25 percent, according to a survey released last month by World Wide Worx.
The biggest constraint has been cost, with Telkom fixed-line connections too expensive for the country's poor and wireless services more costly than in other sub-Saharan states, it said.
The question remains on what is the best way to bring low-cost Internet connections to the majority of the people.
"The main issue is whether the government looks at Telkom from the point of view of what's best for Telkom as a company versus what's best for South Africa as a country," Pater said.
(Editing by Jon Herskovitz and David Cowell)