French firm gives Treasury tough terms on Telkom

France Telecom has given the Treasury six months to increase its stake in Telkom Kenya to 40 per cent as the government maintained its decision to raise the ownership will be tied to the telco’s performance.

The Treasury’s stake in Telkom Kenya dropped to 30 per cent in December after it failed to inject Sh2.4 billion in the firm, but has option to return its stake to 40 per cent by June.

The investment secretary at Treasury Esther Koimett said Friday that cash injection will be tied to Telkom Kenya’s ability to cut losses and availability of resources for a government faced with a tight budget.

“The option for the government to retain a 40 per cent stake is still open, however, a decision whether to retain this (option) will be dependent on the availability of resources and the ability of the firm to return to profitability,” said Ms Koimett, who represents government interests on Telkom Kenya’s board.

But France Telecom reckons that the government will lose the right to acquire the additional shares should the state fail to meet the June deadline.

“The (current) agreement covers up to the end of the GoKs (Government of Kenya) financial year at the end of June. I imagine there would, therefore, have to be new discussions if the GoK wanted to increase its stake beyond that date,” said Tom Wright, the press officer at France Telecom in an e-mail response to the Business Daily.

He added that failure by the Treasury would not affect Telkom Kenya’s operations, adding that the operator will turn to bank or shareholder loans in the event of a cash crunch.

“There is no impact on the operations or day-to-day running of Telkom Kenya as a result of this agreement, even if the GoK does not bring the additional funds provisioned for 2012,” said Mr Wright.

The government had an agreement on December 21 with France Telecom to inject additional cash and write off shareholder loans, aimed at easing the operator’s debt burden that currently consumes nearly half of its annual revenues.

This saw the Treasury convert Sh4 billion shareholder loan into shares as France Telecom swapped its Sh15 billion debt for equity.

The agreement has effectively cut the Treasury’s stake in Telkom Kenya to 40 per cent from 49 per cent and raised France Telecom’s to 60 per cent.

READ: Treasury’s stake in Telkom Kenya drops to 40pc after debt swap

Shareholders agreed to inject Sh10 billion with France Telecom providing Sh5.1 billion and the government the remaining Sh4.9 billion.

The Treasury has offered Sh2.5 billion and delayed the Sh2.4 billion on tight finances linked to below-target revenue collection and high expenditure based on public service salary hikes. This has pushed France Telecom stake to 70 per cent.

More recently, the huge losses had forced Telkom Kenya to rely on shareholder and bank loans — a mode of operation that raised its interest expenses to nearly half the revenues.

Telkom’s interest expenses rose to Sh4.7 billion in 2011 from Sh883 million the previous year as it took on more shareholder and bank loans.

The re-organisation agreement is billed as the most expensive in corporate Kenya having consumed Sh119 billion in the past six years. The process began with an Sh85 billion clean-up of Telkom Kenya’s books in readiness for privatisation in 2007.

The huge investment has, however, not prevented Telkom from sinking deeper into losses, making it one of the worst investments for France Telecom, which bought a 51 per cent stake in the Kenyan firm for Sh27 billion in December 2007.

Telkom made Sh9.2 billion in revenues in 2011 and an Sh18 billion net loss in what its management blamed on the price war in the voice calls market that saw tariffs drop by half in 2010.

The French had hoped in 2008 to return firm to profitability by end of 2011 but this was scuttled by the deep cuts in call costs that hurt revenues.

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