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Local wheeler-dealers eyeing stake in Telkom Kenya complicate Orange exit

By Jevans Nyabiage and Wanjala Were | November 18th 2014 at 00:00:00 GMT +0300

The intrigues surrounding the exit of the Frenchmen in Telkom Kenya have deepened, as it emerges that a cabal of local businessmen are after a piece of the telecoms operator.

According to our source, who is privy to the discussions, in exchange for a stake in the operator, these ‘powerful’ businessmen say they will prepare the way and make it easy for Vietnamese operator Viettel to acquire the 70 per cent stake in Telkom Kenya that France’s Orange Telecom holds. The Government owns the remaining 30 per cent.

This new development has threatened to throw off the Frenchmen’s exit. Already, Orange Telecom has more or less given up on turning around the loss-making and heavily indebted Telkom Kenya, and it wants a way out.

Many potential suitors have come shopping for Telkom Kenya, but few have shown as much desire, drive and focus to enter the Kenyan telecoms market as Viettel.

But matters have become complicated.

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Potential suitors

Viettel wants an 80 per cent stake in Telkom Kenya. This means the Vietnamese will buy the 70 per cent owned by Orange Telecom, but the Government would be required to cede 10 per cent, said sources close to the negotiations.

However, there are fears this 10 per cent, or at least a portion of it, will go to a clique of powerful local businessmen who are alleged to be looking out for the interests of the Vietnamese.

“... the French are definitely pulling out, as already confirmed by them and Viettel,” said our source who spoke on condition of anonymity. “Viettel are the frontrunners in buying them out subject to ‘discussions’ [referring to local interests]. Now, they [Viettel] have deftly asked Treasury to dilute their shareholding by 10 per cent.”

The local businessmen are alleged to be able to assist Viettel push for an extension of all licences held by Telkom Kenya for another 15 years.

The Telkom Kenya licences, issued by the then Communications Commission of Kenya, expire in 2023.

How this saga develops could be akin to the Mobitelea/Vodafone arrangement.

Mobitelea got a 5 per cent stake in Safaricom at the time of Vodafone’s entry into Kenya in 1999. Mobitelea’s stake was in exchange for advising UK’s Vodafone “on local businesses and processes”.

The owners of Mobitelea have not been publicly named since their ownership came to light in 2007.

When contacted, Viettel confirmed their interest in Telkom Kenya but declined to comment on the issue of their entry strategy.

“Our Kenya project is still under implementation and we have not reached any final result,” said Hanoi-based Viettel Global Investment in response to questions from Business Beat.

However, Bui Thi Phuong Thao, from the communications department, said Viettel’s entry into Kenya would give the operator great advantages in operating its network in the East African region.

“... we are seeking investment opportunities in some African countries, including Kenya. Everything is in progress; until now, we have no final results,” Mr Bui said.

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The firm, which is owned by the Vietnamese army, said it currently runs projects in Mozambique, Burundi and Tanzania.

“We want to expand to any country in the world where there are opportunities for us, not only African markets. We will actively inform all press when we come to a final result.”

However, the Government has termed Viettel’s demands for Treasury to cede an additional 10 per cent and extend Telkom licences for a further 15 years as “baseless”.

Treasury Cabinet Secretary Henry Rotich told Business Beat that the Government would not cede any more of its stake.

“We won’t give in to their requests. This is a privatisation issue that is guided by rules and procedures,” said Mr Rotich.

He added that the negotiations are between Orange and the potential buyers of its stake, not Treasury’s.

On the demand for licence extensions, Rotich said this does not add up, and questioned the motive behind the request since the telco’s spectrum licence will expire in 2023.

“You cannot ask for renewal even before licences expire. Renewal of licences is a regulatory issue. Just like other operators, they have to follow procedure.”

When reached for a response on these issues, Orange, who wrote to the Government early this year on their intention to sell their stake in Telkom Kenya, declined to comment.

“The Orange Group does not wish to comment on this ....Such discussions are confidential,” said Tom Wright, the firm’s press officer.

 Orange Telecom bought a 51 per cent stake in Telkom Kenya from the Government for around Sh27 billion in 2007. Treasury was left holding on to a 49 per cent share. Orange’s stake in the Kenyan telco increased to 70 per cent in a complex debt swap agreement.

The French were at the time of their entry interested in making money from a telecommunications market that seemed to have a lot of opportunities and potential for great returns.

But this did not pan out. Safaricom has held on to its dominant position in the voice and mobile money transfer services, and is the only profitable firm among the four telcos operating in Kenya.

yuMobile called it quits earlier this year unable to bear any more losses. Safaricom and Airtel have bought bits and pieces of what is left of it.

Would Viettel’s acquisition of a stake in Telkom Kenya and subsequent entry into the Kenyan market be an empty victory as it was for Orange Telecom and the Indian firm Essar, which owned yuMobile? Maybe not.

For Viettel, failure is not an option. The Ministry of Defence-owned telecommunications firm is one of the greatest exports from the Southeast Asian nation.

Headquartered in Hanoi, Vietnam, Viettel currently has operations in six countries — Vietnam, Cambodia, Laos, Haiti, Mozambique and Peru.

In addition, the company has expressed interest in entering North Korea, Cuba, Venezuela, Slovakia, Paraguay and Cameroon.

Overseas expansion

Viettel’s overseas expansion strategy is firmly focused on Africa, with the company owning a number of operators and licences across the continent, including Movitel of Mozambique, Viettel Cameroon and a 65 per cent stake in Tanzanian mobile startup Epocha & Golden Ocean Tanzania (trading as EGOTEL).

In January, Viettel was the only applicant for Burkina Faso’s fourth mobile licence, and it has also expressed interest in acquiring licences in Cote d’Ivoire and Swaziland.

With this kind of drive, many telecoms industry analysts think Viettel’s entry into the Kenyan market could be a gamechanger.

Analysts say the fight could be around Telkom Kenya’s spectrum and infrastructure.

The world over, telecom spectrum issues are rife with corruption.

“They are some of the most lucrative avenues for graft because the resource being sold is essentially intangible to the public,” said Peter Wanyonyi, a telecoms analyst.

For instance, in 2010, the Indian government lost more than $5 billion (Sh449.5 billion at current exchange rates) in an infamous scam in which companies were undercharged for spectrum during auctions, with politicians receiving hefty payoffs to help businesses avoid paying full costs.

Mr Wanyonyi said Viettel appears to be acting from a position of excellent information, which indicates that they have insider contacts.

“The ceding [of Treasury’s stake] is not really a problem, provided the proper channels are followed and the State — and therefore the citizen — gets value for money, whether directly or in terms of services delivered,” said Wanyonyi.

He added that the problem would be the unilateral extension of licences without recourse to due process, which would more or less be equivalent to a Government subsidy.

“This is not acceptable, but the President himself said on February 14 this year that there are very powerful, very corrupt entities in Government who are effectively running a parallel administration, and whose base, he said, was the Office of the President,” Wanyonyi said.

He said such sweetheart deals are likely to have emanated from there, and it would be up to Rotich and the Communications Authority of Kenya (CA) to ensure Telkom Kenya’s sale does not turn into another Mobitelea-style deal.

Emotive sale

What makes Telkom Kenya’s sale emotive is that billions of tax shillings have been pumped into the firm.

In December 2007, Kenya sold Telkom Kenya mainly to stop the perpetual pumping of taxpayers’ cash into what had evolved into an inefficient monolith.

The bloated operator back then was privatised because it did not have the resources to invest in new technology.

France Telecom, now known as Orange Telecom, was believed to have the solid capital resources to invest in getting the company to a level that would enable it compete with nimbler, more modern players.

But, seven years down the line, none of the objectives for which Telkom Kenya was sold have been met.

France Telecom was expected to steer Telkom Kenya to profitability in three to five years in preparation for the ultimate prize: listing at the Nairobi Securities Exchange (NSE).

Strategic investor

According to the privatisation deal, the first phase would involve offloading of the Government’s 51 per cent of shares to a strategic investor.

In the second phase, which was to take place between the second and fifth anniversary of the arrival of the strategic investor, the Government would offer 19 per cent of its remaining shares to the public through an initial public offering (IPO), scaling down its stake to 30 per cent. The strategic investor would also be required to reduce its stake to 40 per cent during the IPO.

What has been successful is that the Government’s stake has been cut to 30 per cent, but not through an IPO as was initially anticipated, but because the French slowly diluted Treasury’s shareholding.

Further, the Government had to pay billions of shillings in preparation for the sale, with the privatisation being billed as the most expensive in corporate Kenya. It is estimated to have cost more than Sh120 billion over the past seven years. And the operator is still in financial distress, perpetually knocking on the Government’s door for bailouts.

Just a year after taking up a majority stake in the operator, Orange, in March 2008, requested a short-term shareholder loan of Sh6.4 billion. Two years later, the French firm handed the Government a Sh32.9 billion demand, saying it had bought an “empty shell”.

Orange said it could not trace some of the assets that were on the books of the company at the time the transaction was signed off.

The firm quietly negotiated a sweetheart deal with the Treasury that offered Telkom Kenya rights over assets built by the Government.

The assets included the State’s 20 per cent interest in cable companies Teams Ltd and NOFBI, which were built in 2007 to boost ICT penetration in remote areas.

The huge investment has, however, not prevented Telkom from sinking deeper into losses. As at August 31, 2014, the losses stood at Sh6.1 billion.

Orange’s bid to sell its stake in Telkom Kenya has turned into a circus of sorts. Aside from Viettel, Nigeria’s Megatech and South Africa’s MTN have also indicated interest in Telkom.

Possible merger

Viettel, whose latest data puts its subscriber base at 63 million and revenues at Sh602 billion ($7 billion), went for Orange’s assets after Safaricom and Airtel successfully bid to buy Essar Group’s telecom operations in Kenya, edging the Vietnamese firm out.

Another telecoms giant, MTN, is also said to have bid to buy Orange’s assets. MTN is already in the Kenyan market through MTN Business. The firm, which has more than 200 million cellular subscribers in Africa and the Middle East, has been trying to enter the Kenyan mobile telephony market for a long time.

The segment has, however, proved a hard nut to crack. In 2007, the firm was among those that bid for a 51 per cent stake in Telkom Kenya but lost to France Telecom.

At one point, MTN was rumoured to have bid to buy Zain Africa’s operations, but again, it was beaten to it by India’s Bharti Airtel, which gave a better offer. Before buying Zain Africa’s operations in 15 countries, Bharti Airtel was in talks for a possible merger deal with MTN, but this did not go through.

The identity of the third bidder for Telkom Kenya, a UK firm, remains a closely guarded secret. It is unlikely, though, that this is Vodafone, as it already has a stake in Safaricom.

Telkom Kenya has three main assets: subscribers, mobile frequencies and a substantial fixed-line network.

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Telkom Kenya Orange Cabinet Secretary Henry Rotich
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