A major stake in South Korea's Hanarotelecom Inc. (KOSDAQ:033630) (033630.KQ) is on the sale block, but the telecom operator's major shareholders, American International Group Inc. (NYSE:AIG) (AIG) and private-equity firm Newbridge Capital, may struggle to lure a buyer.

Tepid growth prospects and intensifying competition in South Korea's saturated telecom market; uncertainty whether a major turnaround in earnings can be achieved; and a tough regulatory environment in South Korea pose major risks for new investors, analysts say.

Five years ago, Hanarotelecom was on the verge of bankruptcy, with debt mounting and competition heating up in an overcrowded broadband market. Following a reorganization, a foray into the voice market and a $500 million equity investment by U.S. insurer AIG and Newbridge, Hanarotelecom appeared to be set for recovery.

Last month, AIG and Newbridge named Goldman Sachs Group Inc. (NYSE:GS) (GS) as an adviser to review strategies for a possible sale of their roughly 39% stake in Hanarotelecom.

Based on Hanarotelecom's Monday closing price of 8,650 won a share, the consortium's stake is valued around KRW790.7 billion (US$850 million). The AIG- Newbridge consortium bought the stake in 2003 at KRW3,200 a share, which is equivalent to KRW6,400 following a 2-for-1 share consolidation in May 2006.

Analysts and market watchers have speculated that two local operators could be potential buyers: SK Telecom Co. (NYSE:SKM) (SKM), the country's largest wireless operator by revenue, which already owns a 4.7% stake in Hanarotelecom, and conglomerate LG Group, which owns fixed-line operator LG Dacom Corp. (Korea:015940) (015940.SE) as well as mobile-phone operator LG Telecom Co. (KOSDAQ:032640) (032640.KQ).

Both SK Telecom and LG compete with telecom giant KT Corp. (NYSE:KTC) (KTC) in the South Korean market for telecom services. By purchasing a stake in Hanarotelecom, SK Telecom would be able to offer a so-called triple play service which combines voice, video and data. LG could benefit by gaining more broadband subscribers from Hanarotelecom.

SK Telecom Chief Financial Officer Sung Min Ha said the company isn't in talks to buy a stake in Hanarotelecom and declined to comment further.

LG spokesman Jeong-Suop Hwang said the company isn't in talks currentlyIn 2003, LG made an unsuccessful attempt to purchase Hanarotelecom, but Hanarotelecom shareholders voted in favor of an investment by the AIG-Newbridge consortium.

"We are not interested in Hanarotelecom.