The French’s eight-year expedition in the Kenyan telecoms market ends next month, Business Beat has learnt.

France Telecom, which trades as Orange, is selling its 70 per cent stake in Telkom Kenya after failing to make headway in Kenya.

Helios Investment Partners, a UK private equity firm, has variously been linked with the buyout of the French firm. Sources at the Treasury and Telkom Kenya have confirmed that the pan-Africa-focused equity firm is angling to buy Orange’s stake.

“We expect the deal to be concluded next month [October]. We should be able to give the details then if it is finalised as planned. It is true that we are actually talking to Helios, and if you ask me next month, I should be able to give you all the details,” a source at Orange Kenya told Business Beat.

The source confirmed that the new investors had already been introduced to the Treasury for the Government to know who their new partners will be if the deal is finalised.

Treasury Cabinet Secretary Henry Rotich additionally told Business Beat that negotiations are complete.

“What is happening now is that Orange is introducing to us the new partners that we will work with,” Mr Rotich said.

“We are in discussions with Orange to know the new partner. We also want to know their business strategy and ability to run Telkom Kenya.”

Orange Group has also confirmed that these negotiations with the Treasury are ongoing.

“The group recently undertook a review of its activities in Kenya and has engaged discussions with the Government, its co-shareholder in Telkom Kenya, with regards to the future development of the company. One option would be to find new partners to ensure the necessary financial and operational resources are available to maintain investment and support continued development,” said Tom Wright, Orange’s press officer.

Treasury, which holds a 30 per cent stake in Telkom Kenya, has previously insisted it wanted a partner that understands Kenyan market dynamics, has a viable business strategy, and the technical and financial muscle to run the operator. Insiders say this could give Helios an upper hand.

Helios is not new to Kenya. It recently exited Equity Bank, a move seen to free up much-needed capital to fund the acquisition of Telkom Kenya.

Equity Bank CEO James Mwangi, during an investors’ briefing last week, revealed that Helios earned about Sh52 billion from the sale of its 25 per cent stake in the bank. Helios’ total return on investment is estimated at 436 per cent on an original investment of Sh11 billion made in 2007.

The equity firm has been shifting its focus to telecoms and oil. Last year, it acquired a Sh3.6 billion stake in Wananchi Group Holdings, an Internet, TV and voice provider. Also, Helios is the majority shareholder in oil marketer Vivo Energy, which trades in Kenya as Shell. The fund is also into upstream oil and gas exploration.

In May, Helios completed an investment of $100 million (Sh10.6 billion) for a 12.4 per cent stake in Africa Oil. Africa Oil and its partner Tullow have discovered oil in Turkana.

The fund is one of the few pan-African private equity investment firms founded and led by Africans.

In Kenya, Dennis Aluanga is the pointman. He serves as partner at Helios Investment Partners. He is also a director at Nation Media Group, Equity Bank and Vivo Energy Kenya.

The bid by Helios comes months after Vietnamese Telco operator Viettel dropped theirs after making demands Treasury termed “outrageous”.

These included the extension of all telecommunications licences held by Telkom Kenya for another 15 years, and an additional 10 per cent stake in the operator, which would have given it 80 per cent shareholding.

BROKEN promises

But Orange is leaving behind a limping operator, going against what it promised during its entry into Kenya in 2007.

It has admitted its failure to turn the telco around. In its 2014 financial report, Orange says it lost control of Telkom Kenya, referring to wrangles with its co-shareholder, the Government of Kenya.

“In 2014, Orange intended to implement certain solutions, allowing it to respond to Telkom Kenya’s financial difficulties. During the fourth quarter, due to continuing disagreements with the government of Kenya, its co-shareholder, Orange concluded it was contractually unable to implement these solutions without the latter’s agreement. This led the Group to conclude that it had lost control over the entity.”

Following the privatisation in December 2007, France Telecom was expected to steer Telkom Kenya to profitability in three to five years in preparation for listing at the Nairobi Securities Exchange (NSE).

Under the terms of the sale to a consortium involving France Telecom and Alcazar Capital, the telecoms services provider was to be listed within three years at the earliest, which was December 2010.

The way the privatisation deal was structured, the first phase would involve the unloading of 51 per cent of shares to a winning bidder, with the Government retaining 49 per cent.

In the second phase, which had to take place between the second and fifth anniversary of the coming in of a strategic investor, the Government would offer 19 per cent of its shares to the public through an IPO — thus scaling down its stake to 30 per cent. The strategic investor would be required to concurrently reduce its stake to 40 per cent during the IPO.

The Government’s stake has been cut to 30 per cent, but not through an IPO as was initially anticipated, but because France Telecom has diluted Treasury’s shareholding.

Until 2012, the Government had a 49 per cent stake in Telkom Kenya, while France Telecom held the remaining 51 per cent.

But the State ceded a 9 per cent stake in December 2012 following a Sh30 billion debt write-off.

The two partners also agreed to contribute Sh10 billion for Telkom Kenya’s turnaround on a pro-rated basis, translating to Sh5.1 billion from France Telecom and Sh4.9 billion from the Government.

While its partner funded its portion fully, the Government only released Sh2.5 billion and was unable to raise the balance of Sh2.4 billion by the time of the agreed deadline of June 2013.

The last dilution caused a public uproar after MPs claimed that taxpayers lost at least Sh30 billion in the conversion of shareholder loans to equity.

Diluted stake

Telkom Kenya resonates with Kenyans because its privatisation has cost taxpayers billions of shillings.

It is billed the most expensive exercise in corporate Kenya and is estimated to have cost more than Sh120 billion in eight years. Yet, the operator is still in financial distress and has been perpetually knocking on the Government’s door for bailouts.

Telkom Kenya was doing better before its privatisation. For instance, the company’s annual revenues in 2006 were Sh12 billion. Last year, Orange’s financial report shows revenues of Sh9.5 billion.

Its rival, Safaricom, reported a Sh163.37 billion in revenues for its financial year ending March 31, 2015 — 17 times more than Telkom Kenya’s. The irony is that Safaricom was just a department in the defunct Kenya Posts and Telecommunications Company.

Analysts say Telkom Kenya is strategically in worse shape than when the French first took over.

First, the Frenchmen squandered the chance to capitalise on Telkom’s leadership in fixed lines.

“Long before others got in on the fiber optic pie, Telkom had the chance to take this and run with it. The French took over and did nothing with that leadership,” said telecoms analyst Peter Wanyonyi.

Telkom is Kenya’s sole provider of fixed-line telephone services and has also heavily invested in three undersea fibre optic cables, TEAMs, Eassy and LION.

It additionally owns the largest terrestrial fibre optic network, which runs from Mombasa to Malaba on the Kenya-Uganda border. The company also manages the Government-owned National Optic Fiber Backhaul Infrastructure (NOFBI) at a fee. Telkom Kenya is yet to translate all this into increased market share.

Second is the question of its assets, with insiders saying Telkom has been stripped of most of them.

Last week, the operator put up for sale 17 properties across the country estimated to be worth Sh1 billion, just days before Orange’s planned exit. Most of the assets earmarked for sale are residential houses and commercial buildings spread across major towns, including Nairobi.

A commercial property along Kisumu’s Oginga Street is the priciest on the list at Sh260 million. Others include a partially complete building in Nairobi’s Embakasi area with a price tag of Sh146 million.

It is not clear if the asset disposal will be completed before the French walk out to pave the way for a UK-registered company into a sector dominated by another London-listed firm, Vodafone.

Telkom Kenya was an asset-rich corporation with buildings in nearly all major towns in the country, which it retained after the mother parastatal was split for strategic reasons.

This is not the first time the firm is selling property. In 2012, the operator issued a tender for the sale of 11 houses valued at Sh80 million in Gilgil, Nakuru County. It also sought to sell 79 acres of land in Nairobi’s Karen area. Analysts have previously warned that the move risked being seen as an asset stripping exercise, since the French owners have already announced their exit.

“What the French are leaving behind is a shell of the company they took over. They have gobbled up lots of Government bailout money with nothing to show for it,” said Mr Wanyonyi.

Although Kenya’s stake had been heavily diluted, Telkom Kenya has been relying on the Treasury for bailouts to settle debts and pay salaries. The latest was an injection of nearly Sh600 million early in the year to pay wages and settle bills.

Cultural connection

Orange has also sold its Ugandan outfit to Lebanon group, AfriCell. But even as it exits East Africa, it is strengthening its West Africa portfolio. It recently bought some of Airtel’s West African units.

The French have a historical, linguistic and cultural connection to West Africa. They will likely find it much easier to do business in West Africa than in East Africa, in much the same way UK’s Vodafone finds it easier to do business in Anglophone East Africa than in Francophone West Africa.

So what is in it for the new owners?

Wanyonyi says with the difficult business environment, it is difficult to see what sort of business model Telkom Kenya’s new owners will use to turn the operator around.

He said they cannot use mobile voice, because not only is this sector saturated, but, looking at the financials of Safaricom and Airtel, voice revenues are plunging fast.

Also, messaging has been killed by Over the Top (OTT) services like WhatsApp and even Facebook, so it is not a possible turnaround avenue either, Wanyonyi said.

Telkom needs to find a way of leveraging data to underpin its turnaround, he said, but added, “I have not seen any strategy or plan from the company with this at the centre of it, though.”

If France Telecom concludes its deal with Helios, it will become the second investor to pull out of Kenya’s telecoms market in as many years after India’s Essar Telecom, the owners of yuMobile.

Analysts say the Kenyan telco market remains a duopoly, with one very strong player and a weak player, while everyone else tries to fit in.

jmiyungu@standardmedia.co.ke

pwafula@standardmedia.co.ke