Five years since the French came to town, Telkom still lives off other people’s money

For five years since Frenchmen came to town on a rescue mission, Telkom Kenya has lived large on other people’s money.

Now, it is emerging that the Telkom is far from being rescued and that huge and expensive loans amounting to Sh51 billion that it borrowed from the banks and parent company, France Telecom, have bled the company to near death.

Other complicated business dealings with the French firm continue to sap the life out of the former state owned firm.

In 2011, the company made a historic net loss of Sh18 billion, after making sales of Sh9.2 billion.

Two weeks ago, the management told shareholders that either the shareholders — who include the taxpayers — provides an immediate loan of Sh5.6 billion, or Telkom Kenya would get into very serious troubles with its bankers, Standard Chartered and KCB.

Telkom is owned 49 per cent by the Kenya government, while France Telecom owns an effective shareholding of 40.3 per cent through Orange East Africa, and Alcazar Capital — a Dubai based private equity firm — owns the rest of the shares.

France Telecom

The management says the company needs a Sh10 billion rescue package.

In addition, it wants the repayment of shareholder loans amounting to Sh41 billion due this month frozen and rolled over.

France Telecom has provided Sh34 billion of these loans, in which it earns an interest rate of between 9.9 and 10.2 per cent in addition to other fees; the Kenya government has lent Sh3.9 billion to the firm.

In fact, so big is the trouble that if Telkom did not meet payment of Sh333 million owed to Standard Chartered that was due on Tuesday, both banks could decide to call in the loans amounting to Sh12.5 billion that Telkom owes the two banks.

In that case, the only bills that Telkom would afford to pay are electricity, water, security, rent and salaries.

Crucial bills amounting to Sh1.9 billion owed to a motley collection of creditors ranging from rival operators to connect Orange Kenya’s mobile phone customers to other networks, advertising agencies such as Ogilvy and Access Leo Burnett, law firms and a bill nearing Sh1 billion owed by firm’s business relationship with its parent company would go unpaid.

In an interview with the Nation, Mickael Ghossein, the chief executive of Telkom Kenya said that the final amount of the shareholder loan was still under discussion.

If the loan does not come through this month, the management warned in a series of presentations to the board of directors prepared on March 7, the Kenyan taxpayers and corporate bigwigs in France would have to dig Sh20 billion deeper into their pockets to keep Telkom afloat and pay off the bankers.

As Telkom Kenya has continued to make huge losses selling in its core business of voice calls and data, the shareholders, mostly France Telecom, have been squeezing interest payments and other fees from the Kenyan subsidiary that could easily rival profits made by some of the biggest banks in Kenya.

Its management, in a presentation made to Telkom Kenya’s board of directors two weeks ago, estimated that it would pay out Sh8.4 billion in interest on its loans from shareholders and banks.

Barclays, Equity and KCB reported net profits in the range of Sh8.5 billion to Sh10 billion for this month for the 2011 period.

This year, Telkom paid out Sh4.6 billion in interest, rivalling the Sh5.8 billion net profits that its banker Standard Chartered made. Hence the big trouble.

The management has been here before. In March 2008 when Telkom Kenya hit a similar rough patch, its managing director Mr Dominique St-Jean hit the panic button and wrote to Mr Joseph Kinyua and his boss Michel Barre of Orange East Africa requesting Sh6.3 billion loan from taxpayers to tide the company over.

This request was granted after rosy presentations showing how the company would be able to fix its finance in five years.

Last year, the company was at it again, this time, the Frenchmen had discovered that Telkom Kenya was in a far much worse operational mess that it had been, and demanded that the government refund the entire $385 million (Sh33 billion) they had paid for a 51 per cent stake.

In legal jargon, the Frenchmen were arguing that the Treasury had “breached warranties”; these are representations that the assets in the books were as good as claimed.

After months of negotiations — and a big deal of political wheeler-dealing and diplomatic push and shove between Paris and Nairobi, the Kenyan Treasury caved in and gave France Telecom a generous settlement worth nearly Sh10 billion.

The government handed over all the national infrastructure that enables broadband Internet connection to happen over to the French firm, plus other sweeteners with an understanding that Telkom Kenya had a head start to dominate the wholesale and retail data market as Safaricom was gearing up to enter this field.

With the 2008 cash injection from the Treasury and France Telecom and a huge stock of shareholder loan portfolio, which now amounts to Sh42 billion including unpaid interest, and the new assets inherited from the government, one would have expected that Telkom Kenya would easily get back on its feet.

Yet, in 2011, the company made a momentous net loss of Sh18.2 billion on revenues of Sh9.2 billion that is expected to worsen over the coming five years.

For instance, in 2012, the company expects to make a loss of Sh24 billion on revenues of Sh11 billion.

Overall, in the period between 2012 to 2016, for which business plans requesting support from taxpayers is based, the company expects to gross Sh77 billion in cumulative revenues and it will lose Sh72 billion after making all the payments.

When selling these figures to its board, Telkom Kenya — and most equities in the technology sector do not like talking about net profit — numbers determine what shareholders really made from a business and sometimes it forms the basis for dividend payments.

Telkom’s executives prefer a number symbolised by an alphabet soup of accounting initials christened EBITDA, which means earnings before interest, taxation, depreciation and amortisation.

Basically, looking at this number helps someone understand the pure economics of a business, as opposed to the messy view that comes when expenses that have little to do with the operation of a business such as the cost of financing a business, expenses of firing workers or closing a business, taxation, and depreciation of assets are included as part of profit calculations.

On an Ebitda basis, Telkom Kenya looks like a solid business, but a bleeding one. For instance, in 2011, before messy expenses such as interest, tax, foreign exchange losses were included, it had an Ebitda of negative Sh4.3 billion, compared to bottom line loss of Sh18 billion after all these are included.

Similarly, on an Ebitda basis, the business would turn the corner in 2013 and dramatically grow into profitability by 2016.

In the next five years, the accounting Abracadabra would turn what is expected to be Sh72 billion net loss into a Sh9.4 billion Ebitda profit.

In the accounting world, it would be expected that the cash position in Telkom books would reflect the positive outlook in its Ebitda, but this is far from reality because even then, the business would be due for another round of shareholder cash injection.

To ordinary Kenyans, the decision to privatize Telkom Kenya to the French company came with a good sense of relief made all easier by the Sh$385 million cheque to the Treasury.

Telkom Kenya was a corporation known for its poor network and customer service, it was a crocodile infested lagoon of petty and grand corruption.

All these were captured by a sense of corporate rot that was both shocking and laughable when an audit in 2006 uncovered that at one point, 10,000 of its 17,800 workers were cooks and watchmen hired at the behest of Kenyan politicians.

Today the company has 1,649 workers. Cleaning up Telkom Kenya in readiness for the Frenchmen came at a heavy cost of Sh94 billion that ordinary taxpayer was either not informed of or ready to grasp.

To be continued Thursday