After scouring Africa for natural resources for years, Asian companies are now looking beyond commodities deals as African consumers have more money to spend.
Telkom said that if talks are successful, it would issue new shares at 36.06 rand each to KT, South Korea's top fixed-line provider. That represents a 12 percent premium to Telkom's closing price on Thursday.
Shares of South Africa's biggest fixed-line firm surged as much as 7 percent, as investors took the news as a much-needed vote of confidence in the struggling company.
KT has been looking for overseas acquisitions as it has fewer growth opportunities in its crowded home market.
"The deal, if agreed, would have an implication, as KT is advancing overseas as the domestic market is maturing and facing regulations. What is important is how it will grow its overseas operations," said Yang Jong-in, an analyst at Korea Investment & Securities.
Battered in recent years by steadily falling fixed-line revenue and expensive blunders in Nigeria, Telkom has been looking to offset shrinking demand for its core business by pushing into new businesses and new markets.
It last year launched a mobile unit that has yet to turn a profit. Analysts have said it will face an uphill battle in a market dominated by Vodafone unit Vodacom and MTN Group. Telkom expects earnings to fall at least 40 percent in the six months to end-September.
Almost 40 percent owned by the South African government, Telkom is aiming to recast itself as a converged multimedia provider offering mobile, fixed-line and data services.
"Telkom has been moving toward a next-generation network infrastructure, which would allow it to become a multimedia player in the market," said Dobek Pater, a telecoms analyst at consultancy Africa Analysis.
"Korea Telecom has been in that position for a while as well, and has obviously progressed along that path further than Telkom has to date."
KT has said it would step investments in emerging markets such as Africa, Latin America and eastern Europe.
In May it agreed to sell a 79.96 percent stake in its Russian unit to local operator Vimpelcom for $346 million, adding it would use the proceeds for new investments.
South Africa's government could be a potential stumbling block to the effectiveness of the partnership, said one analyst, who declined to be identified.
As a substantial shareholder, the government might resist any attempt by KT to streamline Telkom and push for job cuts, the analyst sai
South African media has reported Telkom's former acting CEO stepped down this year because the government would not allow him to make sweeping changes, including job cuts.
Unemployment hovers about 25 percent and President Jacob Zuma's growth plan calls for state-owned enterprises and state spending to create 5 million jobs over the next decade. While not a rapidly expanding economy, South Africa offers foreign companies an entry point into the continent.
In June, US retailer Wal-Mart finalised a $2.4 billion bid for 51 percent of local retailer Massmart, and said it was looking to expand further in Africa.
Japan's Kansai Paint this year finalised control of local paint firm Free world Coatings. A Kansai executive told Reuters last year it could look to expand into other regions of Africa. Deutsche Bank is Telkom's lead financial adviser for the deal. It is also being advised by UBS.
Shares of Telkom were up 1.5 percent at 1426 GMT, having given up most of its earlier gains.
Copyright Reuters, 2011