Review consolidation of telecoms sector

Customers are served outside an Airtel shop in Mombasa. FILE PHOTO | NMG 

By JAINDI KISERO

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Summary

• Two weak companies are merging virtual businesses and entities that have no assets.

I just don’t think the government has thought through a clear strategy on how to guide consolidation of the telecommunications sector into a few strong players, especially in the wake of the impending merger of Telkom Kenya and Airtel.

I say so because when you look at the proposal on the table, what is being planned is a merger of dwarfs. It is structured as a mere financial engineering transaction characterised by asset stripping, hiving off of subsidiaries- but without a major plan for capital injection by the shareholders.

How is the transaction structured? Here is a brief explanation of the steps that the parties plan to follow.

First, it is proposed that all infrastructure assets, mainly towers, be placed into a new company owned on a 60:40 basis by the current owners of Telkom Kenya — Helios and the Government of Kenya.

Secondly, hive off all real estate assets owned by Telkom Kenya and place them into a new real estate company owned by Helios and the government.

Thirdly, create a third company that will be purely a mobile network operator owned by Helios and the government.

Once these three firms have been separated, merge the Telkom Kenya mobile operator business with the entire Airtel business owned on a 50:50 basis between Helios and the government on the one hand- and Airtel’s existing shareholders on the other.

Apparently, a valuation conducted on both companies put the value of Airtel at 15 per cent higher than Telkom Kenya.

Since Airtel is contributing its entire business to the merged entity, an arrangement has been that the extra value it is contributing to the combined entity will be extended to the merged entity in the form of a shareholder loan repayable in four years.

If in four years the government and Helios will not have repaid the loan, Airtel will take control of the combined entity.

In a snapshot, two weak companies are merging virtual businesses and entities that have no assets. The very assets they need in the merged entity to compete with Safaricom are being hived off to independent entities that can be sold to third parties.

I have always maintained that the taxpayer did not get value for money in the Telkom Kenya privatisation. We sold 51 per cent of Telkom Kenya to France Telecom for $390 million in 2007.

What we forget is that -in preparing Telkom Kenya for privatisation, the taxpayer spent much more money. The government wrote off billions of shillings in taxes that Telkom Kenya owed to the Kenya Revenue Authority and in hundreds of millions it paid in fees to transaction advisers.

After the privatisation, the government had to sink in more billions in shareholder loans that it extended to the company while it was under the management of France Telecom.

More significantly, the privatisation of Telkom came at a high social cost to the country because 15,000 former employees of Telkom Kenya had to be sent to the streets.

READ: Telcos market shift as Airtel gains voice traffic, Safaricom drops

We must vigorously prosecute national interest and make sure that the ownership and control of the company which comes out of the Telkom Kenya and Airtel merger goes to a group with deep enough pockets and new capital to invest in the business.

Some of the national interest considerations that should guide the government in deciding whether to support the merger are the following:
First, we must not forget that the government still owns 40 per cent of Telkom Kenya.

Secondly, Telkom Kenya, despite its financial problems, is still a strategic commercial enterprise for our country, owning and running the largest fixed line telephone infrastructure in the country.

Thirdly, it runs and operates, on behalf of the government, the national fibre-optic backbone.

Fourthly, it is interlinked and shares legacy assets with two other strategic commercial enterprises — the Postal Corporation of Kenya (Posta) and the Post Office Savings Bank (Postbank).

Granted, state-owned enterprises such as Posta and Postbank no longer feature highly on the list of the government’s priorities.

Indeed, these companies have been more or less ignored, left to suffer chronic under-capitalisation.

We forget that in countries like Australia, it is the post office that issues driving licences and passports. In South Africa, the post office issues digital addresses.