Will telcos’ merger bid benefit taxpayer?

First, here is the news about recent developments in the mobile telecommunications sector of Kenya. Telkom Kenya has just sold Extelecoms House - the multi storey building on Haile Selassie Avenue - to the Central Bank of Kenya (CBK) at a consideration of Sh1.15 billion.

I called the CBK several months ago to ask why the monetary authority had decided to stray into the business of buying property. I have not received an answer to date. I have also gathered that initially, the land deal had faced a major hitch when the parties discovered that the title had a special condition stipulating that the property could not be sold without prior consent- in writing - by the president of the republic.

But I now gather that the deal has since gone through. Yet this is not the largest asset stripping deal Telkom has done lately.

Last year, the company announced that it had 720 tower sites in a sale and lease back deal to the American Tower Company of the United States.

The consideration in that transaction was not announced at that time. But the news I have now is that the deal was sealed at a price of $235,000 per site, meaning Telkom Kenya pocketed a whopping Sh16.9 billion from the sale of those assets.

Which brings me to the plans to merge the company with Airtel. So far, the details of that merger transaction are the following.

First, the mobile money businesses -namely ‘Tkash’ and ‘Airtel Money’, will not be part of the combined company. Secondly, real estate owned by the two companies are to be left out of the combined company. Thirdly, data platforms will also not be part of the joint venture transaction.

Clearly, the professed objective for the merger-namely, to bring the two telcos together into a strong business with the mettle to compete Safaricom does not hold. I say so because in a merger of two telcos, two things are expected. First, new cash in the business by way of capital injections into the merged entity.

Indeed, cash is what the two companies need to go to the next level. Secondly, when such a merger is in the offing, the expectation usually is that infrastructure sharing must be part of the deal. In most cases, the companies coming together will be touting the benefits of sharing things such as physical towers, real estate assets and spectrum.

Two weak companies

This is not the case with the Telkom-Airtel merger. What we are seeing is a transaction where two weak companies are merging virtual businesses and entities that have no assets. The very assets they need in the merged entity to compete with Safaricom are being hived off to independent entities that can be sold to third parties. There is no realistic chance that the merger will give the sector a mobile telephony operator capable of giving the vastly profitable Safaricom effective competition. But what public policy issues are at stake here?

We must not forget that the taxpayer still owns 40 percent of Telkom Kenya. We sold 51 percent of the company to France Telecom in 2007 in the hope that the taxpayer would get returns and that the public would receive affordable and quality services.

But France Telecom only delivered a beast that was forever demanding increased capital and shareholder loans from the taxpayer. Indeed, the taxpayer ended up inheriting billions of shillings in shareholder loans.

I think the government should take a very keener interest in the proposed merger. We must prosecute national interest vigorously this time around. Granted, the majority shareholder still holds sway. But we must not forget that Telkom Kenya, despite its financial problems, is still a strategic commercial enterprise for our country.

It owns and runs the largest fixed line telephone infrastructure in the country. It runs and operates, on behalf of the government, the national fibre-optic backbone. It is interlinked and shares legacy assets with two other strategic commercial enterprises — the Postal Corporation of Kenya (Posta) and the Post Office Savings Bank (Postbank). I gather that as it seeks Cabinet approval for the merger- the combined company has also sought approval of a long term debt of $25 million, which it wants to use to pay the Communications Authority as fees for a 4G frequency.

Where is the benefit to the taxpayer in the complex merger transaction?