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Investors attracted by Telkom Kenya’s Sh13bn real estate

Orange shop along Koinange Street in Nairobi. PHOTO | FILE
Orange shop along Koinange Street in Nairobi. PHOTO | FILE 

Local and foreign firms fighting to take over French firm Orange’s stake in Telkom Kenya are mainly eyeing the company’s Sh13 billion real estate assets, a valuation report shows.

The report, which Orange prepared ahead of failed negotiations to sell the stake to Nigerian investors, shows that land, together with frequency spectrums and a vast fibre optic cables network, top the list of assets that the French firm is using to entice suitors as it prepares to exit the Kenyan market.

Private equity firm Helios and UK’s British Telecom make the list of investors who have recently expressed interest in buying Orange’s 70 per cent stake in the Kenyan telecoms operator.

The Treasury, which owns a minority 30 per cent of Telkom on behalf of the public and will be co-owner with the new shareholders, has been actively involved in the negotiations.

Telkom’s vast real estate wealth has never been made public and the valuation, which was done nearly two years ago, shows that the firm has 335 properties priced at Sh9.4 billion.

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The majority of the pieces of land have buildings that host telephone switches, repeaters or microwaves.

The Investors Information report separately lists Telkom as owning 39.1 hectares of land and real estate properties along Nairobi’s Ngong Road with 11 residential buildings, a sports club and offices all valued at approximately Sh4 billion.

Telkom owns 23 per cent stake in TEAMs, a 5,000-kilometre undersea fibre optic cable that links Kenya to the global internet superhighway through Fujairah in the UAE.

The company, which was sold to French firm Orange in 2007 at Sh27 billion, also has a 10 per cent stake in another undersea optic cable, LION2, a 2,700-kilometre cable that connects Kenya to the global network through Mayotte in Mauritius, and an eight per cent stake in the East Africa Submarine System cable.

Telkom operates 3G, CDMA, GSM and Wimax frequencies that are critical to the rollout of the increasingly important data services as the voice market continues to shrink.

People familiar with the ongoing buyout talks said that while real estate properties and the frequencies have become key selling points for Telkom, potential buyers have been going deeper and scrutinising how much of the assets are not tied to the company’s heavy debt load. There has also been interest in the technology Telkom is running.

“Telkom Kenya has a rich mix of frequency spectrums and assets portfolio that would attract any potential investor but sound investment decision goes beyond these,” our source said, adding that potential investors are looking at things such as the number of active sites the company has, revenue streams, and control of revenue leakages such as fraud on fixed lines.

Curiously, the investor report does not include Telkom’s debt but other reports have shown that by August 31, 2014, its debt to equity ratio stood at 16 – a figure that is way above the statutory limits.

To compound matters, the two shareholders are yet to agree on how to handle a Sh1.2 billion award that the High Court gave former employees who were retrenched in 2006.

Telkom also manages the National Optic Fibre Backbone (Nofbi), an inland fibre optic cable network that runs across the district/county on behalf of the government.

Victor Kyalo, the ICT Authority chief executive, said the Nofbi deal, which entitles Telkom Kenya to management fees, would be reviewed in the new dispensation.

Under the contract Telkom earns Sh250 million in annual maintenance fees. Auditor-General Edward Ouko has since revealed that taxpayers incurred a Sh2 billion bill in advance fees paid to contractors as management fees, commitment costs, operations and maintenance.

Dr Kyalo said Monday that the Nofbi contract would be reviewed and that the authority intends to house or collocate the Nofbi network in Safaricom buildings or district headquarters.

“This contract wasn’t captured very well in the initial deal and going forward we will terminate the Nofbi traffic to other non-state buildings and review it to capture the collocation fee,” he said.

Last week, Telkom published a list of 17 properties it plans to sell attracting additional interest in the majority owner France Telecoms’ intentions.

The properties on sale are estimated to be worth Sh1 billion and analysts expect the property auction to slow down negotiations of the buyout given its possible impact on the firm’s valuation.

The properties on sale are located in Nairobi, Kisumu, Nyeri, Nakuru Gilgil, Nambale, Moiben and Malindi.

Top on the list is a three-storey building located in Kisumu that Telkom is selling for Sh260 million and a 1.733-acre plot in Embakasi, Nairobi, that is being sold for Sh146 million.

A five-storey building in Karatina, Nyeri is also up for sale at a cost of Sh120 million while another building on the Nyeri-Nanyuki Road is quoted at Sh108 million.

Investors are also said to be keen on getting insights into Telkom’s roll of active customers for voice, fixed data and mobile money as well as the number of agents.

Statistics for the period ended June 2014 paint a gloomy picture of Telkom’s fixed internet data business which has been the key revenue driver since 2007 when France Telecom bought a 51 per cent stake in the firm.

The Communications Authority of Kenya (CA) report shows that Telkom lost 9.8 percentage points market share in fixed internet to stand 1.8 per cent down from 11.6 per cent the previous year.

Its fixed internet subscriber base stood at 2,152 from the previous 11,714, meaning it lost 9,562 customers in one year.

During the same period, Wananchi Group, the owners of Zuku brand, increased its fixed internet market share to 53.6 per cent having added 19,288 subscribers in a year for a total customer base of 63,542.

Liquid Telecoms, another UK firm with a foothold in the Kenyan market controls 16.5 per cent of the market with 19,535 subscribers.

Telkom moved from third position to sixth position having been overtaken by Safaricom, which has 9.2 per cent market share (10,965 subscribers), AccessKenya with 7.1 per cent (8,445 subscribers) and Jamii Telecoms with 6.6 per cent with 7,846 customers.

This means that the elaborate infrastructure has not translated to market-share advantage for Telkom that still trails its competitors in the retail data market.

Telkom’s market share in the key voice market, however, doubled to 7.1 per cent, up from three per cent the previous year.

Safaricom’s share of voice traffic dropped to 74.1 per cent in the 12 months to the end of June, down from 78.8 per cent a year earlier. Airtel’s market share by voice traffic grew to 16.4 per cent up from 10.7 per cent.

The total terminating local mobile voice traffic for the whole year was up 11.5 per cent to 34.2 billion minutes from the previous year’s 30.7 billion minutes.

In 2013 Telkom made Sh9.4 billion in revenue with mobile services accounting for Sh2.7 billion, fixed voice also contributed Sh2.7 billion while wholesale voice and corporate data contributed Sh3 billion and 1.5 billion respectively.

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