Capital Markets

Treasury’s stake in Telkom Kenya cut after debt swap

A Telkom Orange shop in Nairobi. The Treasury has reduced its stake in the loss-making firm to 40 per cent after a debt swap. Photo/FILE
A Telkom Orange shop in Nairobi. The Treasury has reduced its stake in the loss-making firm to 40 per cent after a debt swap. Photo/FILE  Nation Media Group

The Treasury’s decision to convert its Telkom Kenya debt into equity has cut the government’s stake in the firm by nine percentage points leaving the majority shareholder, France Telecom, with nearly two thirds of the company.

The changes follow last week’s announcement that the Treasury was converting its Sh4 billion shareholder loan to the telecoms operator into shares as France Telecom swaps its Sh15 billion debt into equity to ease the heavy debt burden on the firm.

The agreement has effectively cut the Treasury’s stake in Telkom Kenya to 40 per cent from 49 per cent and raised France Telecom’s stake to 60 per cent.

The government’s Sh4 billion loan to Telkom is equivalent to 26 per cent of what France Telecom is converting to equity in the firm.

The debt conversion deal has left France Telecom effectively in charge at Telkom Kenya with a 60 per cent shareholding, having swapped its Sh15 billion debt for equity.

Analysts said the conversion is highly overpriced having valued the loss-making Telkom Kenya at Sh166.6 billion compared to its dominant rival Safaricom whose market valuation stood at Sh200 billion by close of business Tuesday.

Safaricom is Kenya’s most profitable company that controlled 80 per cent of the telecoms market in June compared to Telkom Kenya’s stake of 0.8 per cent and analysts reckoned that France Telecom may have negotiated a deal that gives Telkom Kenya exclusive control over state-owned telecoms assets.

“Our voting rights in Telkom Kenya will be weakened, but we are working on whether it’s prudent to inject more cash in the firm to return our stake to 49 per cent,” said Finance minister Njeru Githae.

The Treasury is weighing the opportunity cost of keeping government shareholding at 40 per cent compared to 49 per cent.

“If we find that the effect is small or zero we will be comfortable with lower a stake,” Mr Githae said.

The Treasury recently lent Telkom Kenya Sh2.5 billion and Mr Githae said the state could inject another Sh2.5 billion for an additional stake in the loss-making firm.

The restructuring deal, which has prompted France Telecom to write off another Sh15 billion of the Sh30 billion it had lent Telkom Kenya, is aimed at easing the operator’s debt burden that currently consumes nearly half of its annual revenues.

The pricing of the debt swaps means France Telecom is buying a nine per cent stake that was valued at Sh4.76 billion in 2007 for Sh15 billion based on the Sh27 billion it paid for the 51 per cent.

Telkom Kenya’s losses were lower that year compared to the current numbers.

“Assuming no other undisclosed transaction, it looks France Telecom has paid about Sh25 billion for the nine per cent stake given shareholder swaps and Sh15 billion write off,” said Erick Musau, an analysts at Standard Investment.

“I suspect the government might have given up something they are not disclosing. It’s difficult to understand how an investor can write off Sh15 billion for nothing,” he said.

Sources familiar with the agreement said the debt swap was tied to an earlier one that saw the Treasury and France Telecom settle a $325 million (Sh27.6 billion) demand by the French firm.

France Telecom had claimed that some of the assets it had paid for could not be traced in the company’s asset register.

Under the settlement, Telkom Kenya was granted the government’s 20 per cent interest in the fibre-optic cable company, Teams.

France Telecom was also given an exclusive operational and maintenance contract for the government-owned nationwide optic fibre network known by the acronym NOFBI.

The network covers 4,233 kilometres through Coast, Western, Nyanza, Central and North Eastern Provinces.

NOFBI was built by the government in 2007 at a cost of $60 million.

Mr Githae said the transaction did not involve any assets but failed to explain the terms under which France Telecom is writing off the Sh15 billion debts.

“This is a straight forward transaction and no assets were involved,” said the minister.

More recently, the huge losses had forced Telkom Kenya to rely on shareholder and bank loans – a mode of operation that raised its interest expenses to nearly half the revenues.

Telkom’s interest expenses rose to Sh4.7 billion in 2011 from Sh883 million the previous year as it took on more shareholder and bank loans.
The interest expenses were equivalent to 51 per cent Telkom’s 2011 sales of Sh9.2 billion.

Besides the Sh34 billion shareholder loan, Telkom has multi-billion shilling borrowings with Standard Chartered Bank and KCB Group.

Telkom asked its shareholders for a Sh10.9 billion loan this year to support operations, financing and capital spending in 2012.

France Telecom has so far provided Sh5.6 billion while the government has pumped in Sh2.5 billion of the Sh5 billion expected from Treasury.

Analysts reckon that Telkom’s borrowing to finance a capital hungry business in a high interest rate market had proved unsustainable, prompting the balance sheet restructuring.

The re-organisation agreement is billed as the most expensive in corporate Kenya having consumed Sh119 billion in the past six years. The process began with an Sh85 billion clean-up of Telkom Kenya’s books in readiness for privatisation in 2007.

The huge investment has however not prevented Telkom from sinking deeper into losses, making it one of the worst investments for France Telecom, which bought a 51 per cent stake in the Kenyan firm for Sh27 billion in December 2007.

Telkom made Sh9.2 billion in revenues in 2011 and an Sh18 billion net loss in what its management blamed on the price war in the voice calls market that saw tariffs drop by half in 2010.