Airtel Kenya has won a fresh waiver on the shareholding rule that required it to sell a 15 per cent stake to local investors by April next year, leaving India’s Bharti Airtel firmly in control of the second largest telecoms operator.
Finance minister Njeru Githae told the Business Daily that the waiver was granted after Airtel reported that it was having difficulties finding Kenyan buyers of the 15 per cent stake worth more than Sh5 billion.
The law requires telecom firms to have at least 20 per cent local ownership but Airtel is 15 per cent in breach of the rule because businessman Naushad Merali has a five per cent stake in the company. Bharti Airtel owns 95 per cent.
Unlike in the past when exemption to the local shareholding rule was limited to a determined period, Mr Githae said the fresh exemption would be open-ended.
That means Airtel can now do business in Kenya unconstrained by pressure to find local buyers of the stake.
“The exemption of Airtel from the local shareholding rules is now open-ended,” Mr Githae said adding that the shares will remain available for interested locals to buy.
Airtel’s difficulties in finding a buyer for the stake has been linked to the mismatch between the company’s valuation and local investors’ assessment of its worth arising from the fact that the business remains in the loss-making territory.
The 15 per cent stake is now estimated to be worth Sh5.3 billion based on the $63.75 million (then Sh4 billion) that Mr Merali earned when he sold the equivalent stake to Zain Group in 2009.
Mr Merali, the only local shareholder, sold the stake to Kuwait-based Zain Group, which in June 2010 sold its African interests to Bharti Airtel.
The Ministry of Information granted Zain a three-year exemption from the local shareholding rule for Mr Merali’s sale to go through and subsequently extended the exemption that was to elapse this year to 2013.
Removal of the exemption deadline gives Airtel Kenya’s foreign owners more time to improve the company’s performance and fetch a higher price for the stake. Finding a local with Sh5 billion for the stake will be no mean task for Bharti Airtel, analysts said.
“The company has a long way to go in terms of profitability and competitiveness,” said Eric Musau, an analyst at Standard Investment Bank.
Airtel’s return to profitability has been complicated by the vicious price wars in the industry that started in 2010 and continue to erode investor confidence in the telecoms sector.
On Monday, the Communications Commission of Kenya lowered the Mobile Termination Rate (MTR) to Sh1.44 from Sh2.21, a move expected to result in a net industry saving of Sh2 billion annually in fees paid to rivals for receiving cross-network calls.
Safaricom, which dominates the voice business, is the biggest loser of the MTR cut that is set to save its rivals hundreds of millions of shillings.
Safaricom is the only operator that benefits from the current termination rates, according to the latest industry data. It earned Sh3.8 billion from MTR in the year to June while Airtel, its main rival, paid out Sh3.4 billion, Essar (Sh1.01 billion) and Telkom Kenya (Sh307 million).
Francis Wangusi, the CCK director-general, yesterday said the rate would be backdated to July, meaning the operators will have to revise their invoices or offer credit notes to the sum already settled.
Safaricom earned the largest fees from control of 80.9 per cent share of the voice traffic. Airtel has 10.9 per cent of the voice market, Yu (7.7 per cent), and Telkom Kenya (0.8 per cent).
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 four per cent of the 21.75 billion minutes to rival networks.
The MTR fell from Sh4.42 in June 2009 to Sh2.21 in July 2010, and was to drop to Sh1.44 last June before President Kibaki stopped it for a year following intense lobbying by Safaricom and Orange.
Safaricom earns about Sh4 billion annually for connecting rivals, which is 43 per cent of Telkom Kenya’s 2011 revenues of Sh9.2 billion.
Airtel says it will not reduce its calling rates following the MTR cut, a position that has been echoed by Telkom and yU.
Airtel’s fresh exemption from the local ownership rules also gives its current shareholders room to invest billions of shillings in network upgrade without the impediments of local owners who may balk at injecting additional capital in a loss-making business.
Last week, for instance, the government diluted its stake in loss-making Telkom Kenya to 40 per cent from 49 per cent in a move that raised the shareholding of its partner, France Telecom, by nine percentage points to 60 per cent.
This came after the Treasury converted its Sh4 billion loan to Telkom into equity as the French conglomerate made a similar transaction with its Sh15 billion loan to the company to lessen its debt burden.
To attract new investments into the sector, the regulation capping foreign ownership of telecom companies at 80 per cent was in 2009 relaxed to allow foreigners to launch operations without a Kenyan partner and gradually comply by finding local partners in three years.
The rule also applies to firms that are facing difficulties raising capital from local shareholders who may seek exemption to allow Kenyan investors to dilute their stake below 20 per cent for new buyers to inject capital.
This change in regulation is what allowed Information minister Samuel Poghosio to let Mr Merali sell a significant portion of his shareholding in Airtel (then Zain) 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 play one of the smartest boardroom chess games that pitted 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.