French firm says it has lost control of Telkom Kenya

France Telecom, the majority shareholder in Telkom Kenya, has reported to its owners the loss of control over the Kenyan operation, leaving its long planned exit in the hands of the Kenyan government.

The French firm, with a 70 per cent stake in Telkom Kenya (Orange), says in the financial report for the year ended December 2014, that disagreements with the Kenyan government — its sole partner in the business with a 30 per cent stake — has reached a critical level.

“During the fourth quarter, due to continuing disagreements with the Government of Kenya, Orange concluded it was contractually unable to implement any solutions to the challenges facing the business without the latter’s agreement. This led the group to conclude that it had lost control over the entity,” the financial report says.

France Telecom said the phrase “loss of control” mentioned in its annual accounts meant it no longer considered itself capable of taking certain decisions own its own as the controlling shareholder.

“Loss of control refers to the fact that Orange considers that it is unable, as a majority shareholder, to take decisions and implement by itself certain solutions to Telkom Kenya’s financial difficulties,” Tom Wright, the corporate press officer at France Telecom’s Paris headquarters, said.
France Telecom says the loss of control at Telkom Kenya has forced it to change the accounting method.

“This change in accounting method has no material impact on the 2014 net income and 83 million euros (about KSh8.5 billion) were reclassified from equity attributable to the non-controlling interests to equity attributable to the owners of the parent,” the financial report says, implying possible further erosion of the government’s stake in the company.

Disagreement between the Kenyan government and France Telecom intensified last year after the minority shareholder refused to give in to demands of Viettel Group — the Vietnamese firm that had expressed interest in acquiring a majority stake in the Kenyan company.

READ: Nigerian, Vietnamese firms in race to buy Telkom Kenya

Megatech Engineering Limited of Nigeria was also reported to have expressed interest in acquiring France Telecom’s stake in Telkom Kenya.

Viettel had, among other things, demanded the immediate extension of all telecommunications licences held by Telkom Kenya for another 15 years.

The Vietnamese company had also asked the Kenyan government for additional 10 per cent stake in Telkom Kenya, a demand that would have left the local shareholder with a paltry 20 per cent stake.

France Telecom had said that a transition agreement with the new buyers would ensure smooth change of ownership and preserve the quality of service to subscribers.

ICT secretary Fred Matiang’i had in November told the Business Daily that France Telecom’s exit had created fresh opportunity for other investors, including a local IT firm and Kenyans in the diaspora to own Telkom Kenya.

Treasury secretary Henry Rotich weighed in with the promise of a smooth transition managed by a team of experts from the Attorney-General’s office, the Treasury and the ICT ministry.

The team was to advise the government on the next steps should France Telecom fail to come up with a feasible exit plan.

The two Cabinet sectaries could not be reached Monday as their mobile phones went answered. 

France Telecom bought the majority stake in loss-making Telkom Kenya in 2007 promising to turn around its dwindling fortunes. But the company has in the past seven years remained in the loss-making territory, costing taxpayers billions of shillings arising from non-participation in a series of cash calls.

It has not helped that Telkom Kenya found itself in an increasingly tight operating environment dominated by the market leader Safaricom.

Telkom Kenya has three million subscribers, compared to Airtel’s 5.5 million, yuMobile’s 2.2 million and Safaricom’s 21.8 million, according to the latest industry statistics.

Until November 2012, the government had a 49 per cent stake in Telkom Kenya while France Telecom held the remaining 51 per cent.

The Kenyan government, however, ceded a nine per cent stake to France Telecom in December 2012 through a Sh30 billion debt write-off and shed another 10 per cent stake in June last year after it failed to contribute its Sh2.4 billion share in a Sh10 billion rights issue.

This last dilution caused a public uproar, with Members of Parliament claiming that taxpayers lost at least Sh30 billion in the conversion of shareholder loans to equity.

President Uhuru Kenyatta’s government has effectively suspended privatisation of State-owned firms pending establishment of the proposed Government Investments Corporation to oversee the entire sector.

Telkom Kenya’s revenues have thinned out since August 2010 when the cost of voice calls dropped by more than 50 per cent, halving subscribers’ monthly airtime budget.

This is the reality that convinced Essar Telecom, the owners of yuMobile, to wind up operations in Kenya.

If France Telecom gets a buyer for its stake in Telkom Kenya, it will be the second investor to pull out of Kenya in as many years. Orange also exited neighbouring Uganda last year after selling the 95 per cent stake it had in a local operation to Lebanon-based telecommunications company Africell.

In Kenya, France Telecom said that the decision to leave had also been informed by the ICT secretary’s signal that he intended to cancel a management contract that the company had with the government to manage the National Fibre Optic Infrastructure.

Besides, Telkom Kenya has not hidden its displeasure with the way Parliament’s Public Investment Committee summoned and grilled its top management over the transactions that saw the government’s stake in the firm diluted from 49 per cent to 30 per cent.