The potential strategic deal between South Korean firm KT Corporation and local telecommunications company Telkom has failed to gain the support of the South African government.

Communications Minister Dina Pule told Telkom this week that, following a presentation to Cabinet on Wednesday, the transaction as proposed between the parties would not be supported.

Cabinet pointed out that, as Telkom was a key and strategic asset in the Department of Communications’ (DoC’s) rollout of broadband to all citizens by 2020 and the accompanying telecommunications infrastructure, government and Telkom needed to consider their options for implementing an “urgent” turnaround strategy for the company.

Telkom was required to “get back on its critical centre” of delivering information and communication technology services to all South Africans, the DoC said in a statement late on Friday.

The proposed transaction between Telkom and KT Corp also required the support of the Public Investment Corporation (PIC) and investment management firm Allan Gray, both of which had not yet announced their decisions.

The deal, which was entered into late last year, had been reported as progressing well to date.

In May, the parties reached an in-principle agreement to lower the price of KT Corp’s proposed 20% stake in Telkom. KT Corp could acquire a strategic equity shareholding for a cash price of R25.60 a share, compared with its initial offer of R36.06 a share.

Trade union Solidarity communication, chemical and information industries executive Marius Croucamp on Friday slammed Cabinet’s decision, stating that it was government that initially proposed the deal.

“KT, South Korea’s largest telephone and Internet service provider, made their first bid for a 29% share in Telkom in October 2011 after government had proposed the deal to Telkom,” he said.

He further pointed out that failure of the KT/Telkom deal could result in Telkom cutting costs owing to a lack of capital and retrenching thousands of employees.

A successful transaction would have resulted in the two companies entering a five-year co-source management-services agreement, which aimed to formalise the business relationship, as well as the identified areas of mutual strategic and business cooperation.

Telkom said it would engage the Communications Minister to discuss the implications of Cabinet’s decision. No further details were provided. Cabinet has asked Pule to report back about all the options that are available for Telkom in three months.

Government directly owns 39.8% of Telkom, with the State-controlled PIC holding 10.9%.

The news sent Telkom shares plunging more than 8% on Friday, closing at R21.02 apiece.