Treasury stake in Telkom Kenya to rise by 10 per cent

The Treasury is set to acquire an additional 10 per cent stake in Telkom Kenya under a new deal that has been negotiated as part of the terms of France Telecom’s planned sale of its shares in the company to Helios Investment Partners, a private equity firm.

This means that when the deal is concluded, the government’s total shareholding in the troubled company will rise to 40 per cent.

People familiar with the ongoing negotiations between the Treasury and Helios told the Business Daily that the government is not paying any money for the additional stake but is being paid in kind for not exercising its pre-emptive rights as contained in the shareholder agreement.

That clause gives the Treasury the first priority to buy France Telecom’s 70 per cent stake in the event the French firm decides to sell, as it now plans to do.

The two parties have met several times since last week and the matter is expected to be concluded in the coming week.

READ: France Telecom goes on Africa buying spree after exit from Kenya

The Business Daily did not establish the value of the 10 per cent stake but France Telecom has in the past acquired similar ownership in Telkom Kenya for billions of shillings in the form of shareholder loans or capital calls that gradually reduced the government’s stake to 30 per cent. 

Until 2012, the government had a 49 per cent stake in Telkom Kenya while France Telecom held the remaining 51 per cent. But the State ceded a nine per cent stake in December 2012 following a Sh30 billion debt write-off before losing another 10 per cent in June last year after it failed to inject Sh2.4 billion in a Sh10 billion rights issue.

In October last year, Viettel Group, the Vietnamese company that had offered to buy Telkom Kenya from the French group, demanded dilution of government shares from the current 30 per cent to 20 per cent — a move that is said to have stalled the deal.

READ: Vietnamese firm drops bid for Telkom Kenya stake

Telkom Kenya was sold to France Telecom in December 2007 under a shareholding structure that gave the French firm the majority stake but that has over time only deepened with its acquisition of more shares. 

The Treasury’s stake dropped to 30 per cent after the government failed to participate in a capital call by shareholders in 2012, which saw the government lose the power to retain its blocking vote on shareholder matters.

Deeply in debt

Helios has expressed the intention to acquire France Telecom’s entire 70 per cent stake in Telkom Kenya together with shareholder loans estimated at $225 million.

Whether a private equity firm will succeed where a transnational telecommunications conglomerate has failed remains to be seen. Indeed, Helios is taking huge risks buying an entity that is deeply in debt and more or less insolvent.

READ: Helios entry raises competition bar for Safaricom

Telkom Kenya has been making significant operating losses that clocked Sh4.3 billion in 2014 and was expected to hit Sh10 billion at the end of December 2015.

Besides, Telkom is known to have significant potential financial liabilities estimated to be more than Sh20 billion. This has left Helios with a monumental assignment of not only dealing with the huge amount of liabilities but also turning the company around.

This is the reason it does not surprise that the deal being negotiated has introduced very tough conditions for the private equity group.

Before the execution of the deal, for instance, Helios must provide evidence that it is a financial investor with an existing portfolio of a minimum of $300 million in value.

The company must also show the government a technical services contract with a telecommunications operator or a telecommunications consulting firm able to perform the task.

And, before the deal is consummated, the parties must agree on a business plan that will be attached to the shareholders agreement.

The understanding between the parties is that should additional capital be needed during the first phase of the business plan, any shareholder loans will have to be structured in a manner that is non-dilutive to the government’s shareholding in the company.

The Treasury is also seeking special clauses that shield the government from any obligation to provide loans, equity injections or other funding to the company.

Even more significant is the fact that the government built into the negotiations proposals that will ensure the French investor does not just run away from Kenya, leaving behind a cash-strapped operation that is unable to run as an on-going business.

In the fine print of ‘the heads of agreement’, signed by Treasury secretary Henry Rotich and the managing partner at Helios Babatunde Soyoye, a provision has been made for France Telecom to support the company to the tune of $90 million to address the needs of Telekom Kenya from  January to December 2016.

Telkom Kenya has, despite significant investment by shareholders, not been able to earn sufficient revenues to meet its operating costs, including recovery of investments.

In 2012, the shareholders came up with a business plan, covering the period 2012 to 2016, complete with a balance sheet restructuring formula they touted as capable of restoring the company to solvency but that has had no impact.

Based on the agreement, the funding from the shareholders was to be provided on a pro rata basis. But the government’s tight budget position rendered it unable to fund its portion of the shareholder loan, resulting in the dilution of its stake in the firm.