What the exit of Orange, yuMobile tells us about Kenya's telecoms scene

After about six years of what was the false dawn of a competitive Kenyan telecoms market, Charles Darwin’s theory of survival of the fittest is defining the industry.

France’s Orange announced last week that it is selling its 70 per cent stake in Telkom Kenya to Pan-Africa-focused equity fund, Helios Investment Partners. The Frenchmen are following in the footsteps of the Ruia brothers — Shri Shashi and Ravi Ruia - who last year sold yuMobile and retreated to India.

But as the two operators throw in the towel after years of bleeding billions of shillings in losses, the fittest of them all, Safaricom, is enjoying one of its best years as it celebrates 15 years in operation. The mobile services operator is on course to deliver record full-year profit, it is sitting on a cash pile and its share price remains stable. The telco reported yet another profitability record after it declared a 23 per cent growth in net earnings in the six months to September 2015.

The firm made Sh18.1 billion, up from Sh14.7 billion registered over a similar period last year. Safaricom expects its full-year net profit to be in the range of Sh35.5 billion to Sh36.5 billion, buoyed by strong growth in its data and mobile money business segments. The firm has also upgraded its free cash flow range to between Sh27.5 billion and Sh28.5 billion from Sh25 billion to Sh26 billion.

But for the other players in the sector, the story is drastically different. It is one of losses and despair. The Paris-based Orange Telecom last week signed a binding agreement with Helios Investment Partners for the sale of its entire stake in Telkom Kenya for an undisclosed amount. This ends Orange’s eight-year loss making expedition in Kenya. Also, the sale brings to an end Orange’s long search for an investor to buy its stake in Telkom Kenya, which has sunk into financial troubles despite several capital injections and debt write-offs by its shareholders.

The value of the deal remains a closely guarded secret for now. “Unfortunately, they are not commenting on the transaction at this stage,” said Helios’ PR handlers FTI Consulting. However, sources estimate the deal to be worth about Sh50 billion. The figure is Sh24 billion more than what the Frenchmen paid ($390 million or Sh26 billion) in 2007 to acquire 51 per cent of Telkom Kenya. In the sale, the source told Business Beat that as part of the deal, the new owners are expected to take up Telkom Kenya’s debts accumulated over the years.

Although the actual amount pocketed by Orange is unknown for now, close industry observers believe the deal brokered by the French company amounted to a hefty profit that could cover losses it incurred over the eight years since it started operations. However, Treasury is the biggest loser in the deal having seen its stake diluted from 49 per cent to 30 per cent, even though it has over time injected billions of shillings to keep the operator afloat. Also, Telkom Kenya has lost key assets.

Selling assets

Orange said the finalisation of the transaction remains subject to approval from the relevant authorities. But, the Communications Authority of Kenya (CA) has revealed that Telkom Kenya has not paid annual licence and frequency fees amounting to Sh1.5 billion for the last two financial years. CA Director General Francis Wangusi insists the outstanding bill must be cleared before Orange shares can be transferred to Helios.

“What Helios is buying are the licences and frequencies,” said the source privy to the negotiations, adding that Telkom Kenya resorted to selling assets to meet short-term financial obligations whenever in cash flow difficulties. That could explain why in September, Telkom Kenya put up for sale 17 properties across the country that are estimated to be valued at Sh1 billion. This came just days before the planned exit of Orange. It is not, however, clear if the assets have already been disposed.
Telkom Kenya has been an asset-rich corporation with buildings in nearly all major towns in the country, which it retained after it was split from the parent parastatal for strategic reasons.

Our source added, “By now you must have ascertained that Helios is a forgone conclusion, and as venture fund taking up Orange stake, there’ll be no strings attached like in the case of Mobitelea.” Mobitelea here refers to an arrangement with Vodafone, where unknown individuals received a five per cent stake in Safaricom at the time of Vodafone’s entry into Kenya in 1999. Mobitelea’s stake was widely seen as a ‘gift’ in exchange for advising the 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.

“Great job on the Viettel negotiations – they got them scattered,” the source said referring to the local forces that wanted a share in the deal when Viettel made bid to buy Orange stake.

In exchange for a stake in the operator, these ‘powerful’ businessmen promised to prepare the way and make it easy for Vietnamese operator, Viettel, to acquire the 70 per cent stake in Telkom Kenya. Viettel wanted 80 per cent stake in Telkom Kenya. The Vietnamese firm would buy the 70 per cent owned by Orange Telecom and the Government would cede 10 per cent bringing the total to 80 per cent. It was feared the 10 per cent, or at least a portion of it, would go to a clique of powerful local businessmen for ensuring the deal sails through and taking care of the interest of the Vietnamese firm. Viettel dropped their bid based this unusual demands that Treasury termed as ‘outrageous’.

“Should Helios prevail upon the Kenyan Government to shed part of its stake, then we must safeguard against any below the table deals. On a different note, faced with the cash crunch, the Government will, at some point in time resort to public assets disposal to raise revenue. Top of that list would be viable and attractive assets like Telkom Kenya,” said the source but warns investors to be wary of briefcase investors who would want to make a ‘kill’.

Now, it appears Treasury has a friend in Helios. Treasury has previously insisted that it wanted a partner that understands the Kenyan market dynamics, has a viable business strategy, technical and financial muscle to run the telco. This could have given Helios an upper hand over others such as South African telecom giant, MTN, Vietnamese mobile phone services provider, Viettel and Nigerian firm, Megatech Engineering Ltd, all who are said to have made bid to buy Orange stake.

But Helios is not new to the Kenyan market. It recently exited Equity Bank, a move that has freed up much needed capital to fund Orange acquisition. The fund earned about Sh52 billion from the sale of its 25 per cent stake in the bank. Last year, the fund acquired a Sh3.6 billion stake in Wananchi Group Holdings, owners of Zuku brand. 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 (Sh10.2 billion) for a 12.4 per cent stake in Africa Oil. Africa Oil and its partner, Tullow, have discovered oil in Turkana. And early this month, the fund entered into a joint venture with property developer, Acorn Group, which recently parted ways with financial services group — Britam.

Other investments include Helios Towers Africa and Interswitch/Paynet of Nigeria, and many others.

In Kenya, Dennis Aluanga is the point-man. He serves as Partner at Helios Investment Partners.

However, the exit of yuMobile and now Orange from the Kenyan telecoms market is intriguing and puzzling for analysts, subscribers and potential investors.

Muriuki Mureithi, a telecoms consultant at Summit Strategies Ltd said the challenge for Orange was its market entry strategy and its capacity to sustain and implement it.

“It landed in the market with a bang, using pricing of its products as a tool – remember they offered the lowest calling rate as an incentive to lure customers. Of course other players took the cue and even as it leaves, it still offer prices which worked against it,” Mureithi said in an interview.

But Orange is leaving a limping operator, which goes against what they promised during their entry into Kenya in 2007. Following its privatisation in December 2007, France Telecom was expected to steer Telkom Kenya to profitability in three to five years in preparation for its listing at Nairobi Securities Exchange. But the Government’s stake has been cut to 30 per cent, not through an IPO as was initially anticipated, but because France Telecom has slowly diluted Treasury’s stake. 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 nine per cent stake in December 2012 following a Sh30 billion-debt write-off.

Competitive advantage

The two partners also agreed to contribute Sh10 billion for Telkom Kenya’s turnaround on a prorated basis translating to Sh5.1 billion from France Telecom and Sh4.9 billion from the Kenya Government. While its partner funded its portion fully, the Government only released Sh2.5 billion but was unable to raise the balance of Sh2.4 billion by the time of the agreed deadline, June 2013. Due to the non-payment, the Government’s stake in Telkom Kenya dropped to 30 per cent while that of Orange grew to 70 per cent.

What makes Telkom Kenya at the heart of every Kenyan is that its privatisation has cost taxpayers billions of shillings. The privatisation is billed as the most expensive in corporate Kenya history and is estimated to have cost more than Sh120 billion in the past seven years. And the operator has been perpetually knocking on the government’s door for bailouts. In fact, Telkom Kenya was doing better before the privatisation with annual revenues of Sh12 billion as at 2006. Last year, Orange financial report showed the firm made 85 million euros (Sh9.5 billion) in revenues.

Mureithi said although Telkom Kenya had a huge competitive advantage on the data market with the extensive fibre, copper and legacy connectivity to business, it gave away this in search of the fast growing cellular market, where Safaricom was already fully entrenched. “Unfortunately, the company never changed tact even after realising the strategy was not working for it and this sale is the outcome,” he added.

The Frenchmen squandered the chance to capitalise on Telkom’s leadership in fixed lines in the country. “Long before others got in on the fiber optic pie, Telkom had the chance to take this business segment and run with it. The French took over, and did nothing with that leadership in this market segment,” said telecoms analyst Peter Wanyonyi. Telkom is Kenya’s sole provider of fixed telephone services and has heavily invested in three undersea fibre optic cables— TEAMs, Eassy and LION. Also, it owns the largest terrestrial fibre optic network that runs from Mombasa to Malaba on the Kenya-Uganda border. The company also manages government-owned National Optic Fiber Backhaul Infrastructure (NOFBI) for a fee.

Quality of service

Wanyonyi says Orange and Essar appear to have made serious strategic blunders coming into the Kenyan market. He said when taking on any dominant performer in any segment, especially in telecoms, a new entrant has high hurdles to overcome. They have just two options - either be more innovative and be more different than the incumbent or beat the incumbent by offering cheaper and better services.

In Kenya, it’s easier to achieve market gains than it looks, because the Communication Authority quality of service (QoS) reports showed, neither Safaricom nor Airtel meet their quality of service key performance indicators (KPIs). “There’s therefore a gap in the market for a telecom operator to differentiate itself from the rest by offering excellent services at affordable cost. Neither Essar nor Orange had the chance to do that, and the fault is mostly theirs, but the CA also bears a massive share of the blame,” Wanyonyi explains.

However, he said, the elephant in the room when discussing telecom is M-Pesa. “The money transfer service is so dominant that consumers are more or less stuck with Safaricom for the medium term,” Wanyonyi said.

Mureithi says the entry of Helios means both shareholders in Telkom Kenya are investors and more tuned to the investment side of business and not expertise in the service.

“At best they must look for an operator who brings in impeccable service capability and branding and must explore unique spaces to nimble into the market,” Mureithi said.

Analysts at Standard Investment Bank said Helios could focus on wholesale and internet business using its existing infrastructure as well as sharing its towers. “We do not think it will be a major disruptive force to the industry and will target to turnaround to profitability,” said SIB in its research note to clients, adding that Helios could also target to support Mobile Virtual Network Operators (MVNOs) looking to launch in the Kenyan market.

Helios holds a stake in Wananchi Group. However, it is not clear what arrangement Wananchi could offer Telkom Kenya at this time but the company is market leader on fixed data.