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Telkom boss: Merger with Airtel Kenya is our last hope for survival

By Frankline Sunday | September 1st 2019 at 00:00:00 GMT +0300

Telkom Kenya CEO Mugo Kibati says for the merger to fail it would be devastating for the firm and the industry. [Boniface Okendo, Standard]

Last year, Telkom Kenya and Airtel Kenya announced plans to merge operations in what was billed as the biggest development in Kenya’s telco sector since Safaricom’s Initial Public Offering (IPO) more than a decade ago.

The deal will see the creation of a new entity that will have a 33 per cent subscriber base and the strongest competitor yet to market leader Safaricom.

In recent months, however, opposition to the deal has emerged from several quarters including Parliament, the Ethics and Anti-Corruption Commission (EACC), former Telkom Kenya employees, and most recently, Safaricom that has filed its objections with industry regulator Communication Authority of Kenya (CA).

In an interview with Weekend Business, Telkom Kenya Managing Director Mugo Kibati said the planned merger with Airtel Kenya was necessary not only to ensure survival of the state-owned Telkom but also to sustain the livelihoods of thousands and maintain a competitive telecoms sector.

“We came together with Airtel and looked at the market and it became clear to us that given the regulatory and policy framework and the fact we have one player controlling 90 per cent of the revenue and the rest of us combined only make 10 per cent of revenues, it would make sense for us to come together and take advantage of synergies,” he explained.

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The merger will see the new entity control a market share of 14.4 million customers, with reduced cost in operations such as network rollout, maintenance and customer service.

“Telkom has been ailing for many years since privatisation and several shareholders have tried various ways of bringing it up and find this solution to be better,” explained Mr Kibati.

However, the planned sale has come under headwinds from the EACC that last month instructed the CA to halt the transaction pending investigations into past transactions.

Mr Kibati maintains the transactions under investigation do not pertain to the ongoing merger discussions with Airtel Kenya and as such should not interfere with the transaction. 

“Our stance is to cooperate as much as we can with the EACC, however, nothing about the current transaction is being investigated and no one has come to me to allude or allege any impropriety in regard to the current transaction,” he said.

“The EACC investigation stems from a parliamentary report made in 2014 that has suddenly been revived but there was a change of ownership in majority shareholding in 2016 and when the new owners took over it was on a clean slate.”

Similarly, Kibati says former employees of Telkom Kenya will be catered for and that even the ones to be retrenched in the ongoing restructuring stand a chance of getting a job at the new Telkom-Airtel venture.

“We are merging certain businesses of Telkom with Airtel Kenya to create a joint venture and also leaving behind a much stronger company profit and loss-wise where we are going to build a technology and digital services company that will create new jobs,” he said.

“Former employees will not have their status affected because Telkom Kenya will continue to exist as a legal entity and continue to engage them or any other entity that has claims against it.”

Last month, Telkom announced that 600 employees will be laid off on account of the restructuring and Mr Kibati now says the employees could still get jobs in the new entity.

“The new business will be a different legal entity from Telkom Kenya and most of those employees, in my view and I hope, will find jobs in the joint venture,” he said.

Apart from facing opposition by former employees and the EACC investigation, opposition to Telkom’s proposed merger with Airtel has also come from market leader Safaricom, that was ironically created from a spin-off of the Kenya Post and Telecommunications Corporation (KPTC) that also birthed Telkom.

Last week, Safaricom CEO Michael Joseph said the company had reservations about the proposed merger although he refrained from divulging the details.

“We have our own reservations about the merger and we have submitted these to the regulator,” he said. “I cannot divulge the details because the matter is between us and the CA.”

Mr Kibati says stopping the transaction would put in jeopardy thousands of jobs and negatively impact the telecommunications sector.

“Thousands of people depend on Telkom and this transaction would move Telkom from the very precarious situation it has been in the last 10 years to one which will now have staff with new thriving careers in a stronger entity,” he said.

“I think the authorities are clearly aware of the impact interfering with the transaction would have not just on the business we call Telkom and the legacy it has but on the staff, suppliers and all who are associated.”

At the same time, Telkom boss wants the Government to implement findings of the dominance study conducted by UK consultants Analysis Mason.

The study found that Safaricom’s market share and lead in several segments including mobile communications and mobile money called for regulatory intervention to maintain healthy competition in the telecommunications sector.

“This is the only market globally that has the kind of dominance by one actor that we see in this country and the potential of market failure and ending up with a monopoly is real,” said Mr Kibati.

“The regulators in their own wisdom have undertaken studies and they have reports that indicate to them what they ought to be doing,” he said. “We are just encouraging them to follow through with those courses of action to their logical conclusion.”

Safaricom has, however, opposed implementation of the report arguing the information collected in 2016 is inconsistent with shifting dynamics in the telecommunications sector and called for a fresh study. 

“We do not expect that the study will cure the issues that existed two or three years ago because that information is not current and therefore not effective,” said the company’s chief corporate affairs officer Stephen Chege.

Besides the proposed merger between Telkom and Airtel, the past two years have seen a new service provider, Jamii Telecom Limited roll out a mobile and 4G data network. At the same time, Airtel doubled its market share in the voice and SMS market.

Industry data from the CA indicates Airtel Kenya has grown its mobile subscriber base by 15 per cent between December 2018 and March this 2019. The mobile phone company has seen its market share grow from 21 per cent to 26 per cent over the past three years.

These are some of the developments Safaricom alludes to in calling for a fresh study be conducted.

“The right thing to do would be to start a new process again because we have had changes in the market,” said Mr Chege.

Currently, the market regulator CA is in limbo awaiting the determination of at least two legal disputes challenging the composition and authority of the board of directors.

With the exit of former Director General Francis Wangusi from the helm of the CA last month, the regulator will most likely be coming under a new leadership once the legal disputes are resolved.

Mr Kibati hopes the new leadership will hit the ground running with the transaction between the two telcos high on the priority agenda.

“We would like to have a level playing field and it is not for me or for Airtel to prescribe what is required,” he said. “This is an opportunity for all those actors to take stock of this transaction, what it portends to this country and make sure that we have thriving competition in this market.”

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