Airtel, which entered Kenya in April 2010 after it bought out Kuwait’s Zain, was offered a three-year grace period to comply with the ownership law.
India’s Bharti Airtel must sell 15 per cent of its stake in Kenya’s second largest telecoms operator to a local to avoid getting into trouble with the regulators.
The mandatory share sale is to bring the firm in full compliance with ownership regulations that require telecom companies to maintain at least 20 per cent local shareholding.
Airtel, which entered Kenya in April 2010 after it bought out Kuwait’s Zain, was offered a three-year grace period to comply with the ownership law.
Information minister Samuel Poghisio put the telecom operator in the ownership tight spot with his decision to grant businessman Naushad Merali (the then only local shareholder in Zain) permission to sell 15 per cent of his 20 per cent stake in the firm to foreign investors.
Telecoms regulator the Communications Commission of Kenya (CCK) told the Business Daily that the grace period granted to Airtel will not be renewed meaning the Indian telecoms giant must find a buyer of the 15 per cent stake by April next year.
“Airtel will be required to comply with the ownership policy at the expiry of the waiver period,” said Francis Wangusi, the CCK director general. Senior Ministry of Information officials also insisted that Airtel must get local shareholders by the end of the grace period in March.
“The provision is only for three years after which the beneficiaries must comply,” said Bitange Ndemo, the Permanent Secretary in the ministry. But a lawyer with knowledge of Airtel Kenya’s operations said it has been weighing the possibility of asking for an extension.
The Indian telecoms operator argues that finding a buyer for the 15 per cent stake worth billions of shillings would be difficult given the fact that the business is yet to make a profit since it was launched three years ago.
The 15 per cent stake is now estimated to be worth Sh5.3 billion based on the $63.75 million (now Sh5.2 billion and then Sh4 billion) that Mr Merali earned when he sold the equivalent stake to Zain Group six years ago and would be corporate Kenya’s biggest share transaction in five years if successful.
Mr Merali sold the 15 per cent stake in the then Zain Kenya to Kuwait-based Zain Group, which in June 2010 sold its African interests to India’s Bharti Airtel.
The Ministry of Information extended by one year, the exemption which would have lapsed in the first quarter of this year, based on the 2009 deal. Finding a local with Sh5 billion to spend in the transaction will be no mean task for Bharti Airtel, analysts said.
“It may not be easy for Airtel to attract local investors, the major challenge being that the company is not profitable,” said Eric Musau, a research analyst at Standard Investment Bank. “The process of agreeing on a reasonable valuation of the shares in such circumstances is enormous,” he said. Besides, Mr Musau said Airtel’s inability to pay dividends in the mid-term and local interest in the stake will therefore be mainly speculative.
Airtel did not respond to our questions on this story.
Airtel — which kicked off a price war with Safaricom in August 2010 — is still searching for the formula to profitability. Safaricom controls 80.7 per cent market share in terms of voice traffic – a pointer to the fact that the price war, which halved airtime costs compared to August 2010, has not shifted the players’ stakes significantly.
Airtel’s share of the market stood at 10.9 per cent in the year to June while Essar had 7.7 per cent, according to the latest CCK data.
Safaricom’s dominance of the voice market has dropped to 64 per cent but its share of the revenue remains nearly unchanged — a pointer to the fact that its subscribers have called more with the decline in tariffs.
Airtel has 16.5 per cent of the market, Orange 10.5 per cent while Yu trails with 9 per cent.
Airtel has partly blamed the uncertain regulatory environment, especially the inability of the CCK to lower the mobile termination rate (MTR), for the delay in its return to profitability.
MTR, the rate at which telecom firms pay each other for calls terminating in their networks from outside, fell from Sh4.42 in June 2009 to Sh2.21 in July 2010.
It was to drop to Sh1.44 in June last year before President Kibaki stopped it following intense lobbying by Safaricom and Orange.
Airtel reckons that the delay in implementing new rates is aimed at benefiting its rivals that are partly owned by the government.
The state owns 35 per cent of Safaricom and 49 per cent of Telkom Kenya.
“The apparent interference in the implementation of industry policy, and instances where the policy is implemented in favour of certain operators is impacting negatively on our company’s ability to deliver on its commitments to consumers and shareholders,” Airtel Kenya managing director Shivan Bhargava said early this month.
Infuriated State House
Airtel’s position is said to have infuriated State House — prompting the CCK to issue a statement last week that it is free from political and executive interference.
Analysts say the government and CCK actions point to a souring of relations with Airtel that may have hardened the government’s position on the shareholder exemption issue.
Safaricom is the only operator that has benefited from the current termination rate, according to the latest industry data.
The operator earned Sh3.8 billion from MTR in the year to June while its main rival Airtel paid out Sh3.4 billion, Essar (Sh1.01 billion) and Telkom Kenya (Sh307 million).
Airtel subscribers made 53.8 per cent of their calls amounting to 1.57 billion minutes to rival networks in the year to June while Safaricom’s subscribers made only 4 per cent of the 21.75 billion minutes to rival networks.
Besides, Airtel is planning to invest billions of shillings in network upgrade and there is a feeling the presence of local shareholders could hurt attempts by the operator to raise money from its owners.
To attract new investments into the sector, regulation capping foreign ownership of telecoms companies at 80 per cent in 2009 was relaxed to allow foreigners to launch operations without a local partner and then find local partners comply in three years.
The rule also applies to firms that are facing difficulties raising capital from local shareholders who may seek exemption to allow the Kenyan investors dilute their stake below 20 per cent for the new buyers to inject capital.
This change of regulation is what allowed Mr Poghosio to let Mr Merali sell a significant portion of his shareholding in the company without contravening the law.
Mr Merali reaped billions of shillings in capital gains trading in his Airtel Kenya shares.
The businessman owned 40 per cent of the company when his investment firm, Sameer Group, jointly launched KenCell Communications with its French partner Vivendi in 2000.
Three years later, when the French firm decided it was time to leave Kenya, Mr Merali used his pre-emption rights to stage one of the smartest boardroom chess games that played a number of global telecoms giants against each other for Vivendi’s stake.
He bought the Vivendi stake in KenCell at $230 million and sold it to a new partner, Celtel International, the very same day for$250 million—earning a sumptuous profit of $20 million.
In 2008, he sold half of his 40 per cent stake to Zain and further reduced it to five per cent with the 15 per cent sale in 2009.
