Lights dim on Telkom's NSE listing

When a consortium led by France Telecom paid Sh26.1 billion for 51 per cent stake in Telkom Kenya, it signalled a new era for the then State-run telephone monopoly. But a few years later, the firm still scrawls faintly.

Following its privatisation in November 2007, France Telecom was expected to steer Telkom to profitability in three to five years in preparation for the eventual prize: listing at Nairobi Stock Exchange. Under the terms of the sale of the company’s majority control to a consortium involving France Telecom (40 per cent) and Alcazar Capital (11 per cent), the telecommunications services provider was to be listed within three years at the earliest – which is November this year.

But the company has met stiff competition in the form of three other players in the mobile telephony market namely market leader Safaricom, Zain Kenya and Essar, trading as yu. Before the acquisition, the firm had been weighed down by a huge payroll of more than 18,000 employees and political interference that put its books in disarray.

The number has been reduced to 2,200 after an evaluation by PricewaterhouseCoopers, but still the firm’s chief executive officer, Mr Mickael Ghossein, says that a few have refused to change with time. “We still have a challenge on mentality change,” Mr Ghossein said in an interview last week. “Other employees still think Telkom Kenya is a parastatal, a habit affecting our reputation and the way we do our business. We are fighting this.”

In France Telecom’s full-year financial results for 2009, Telkom Kenya returned a Sh10 billion loss. The losses includes Sh300 million of amortisation of identified acquired assets (net of deferred taxes reversals) and Sh5 billion losses due to goodwill impairment. France Telecom says in its results that the sale price of Telkom Kenya reflected residual goodwill amounting to Sh16 billion.

The group’s financial statements reveal that the France Telecom-led consortium’s total share-holding of 51 per cent is split between France Telecom and Dubai based Alcazar Capital, with the former owning a 78 per cent share while Alcazar has 21 per cent. This means France Telecom effectively holds a 40 per cent direct interest in Telkom Kenya while Alcazar Capital Ltd, a consortium partner in the 2007 purchase of the Kenyan fixed line operator, holds a 10.9 per cent stake.

Dr Bitange Ndemo, the Permanent Secretary in the Ministry of Information and Communications, says Telkom Kenya’s loss is not due to competitiveness, but strategy. “The voice market penetration in Kenya is 50 per cent and internet penetration stands at less than 10 per cent,” says Dr Ndemo. “There are opportunities for all small operators to grow.”

He says with the right strategy, Telkom Kenya would make a profit within the next two years and may be listed in five years’ time. The new anti-monopoly regulations will be published on Friday to assist in instilling fair competition in the market. “Remember it the duty of CCK to nurture a health competitive environment,” Mr Ndemo says.

Mr Francis Hook, the regional manager for International Data Corporation (IDC) East Africa, blames Telkom’s underperformance on poor liberalisation in the local telecoms market in the mid to late nineties. “You may recall there were various attempts to partially privatise Telkom Kenya around 1999 and each time the effort was thwarted either owing to political interference or poor handling of the process,” Mr Hook says.

He says it should have been prepared for competition prior to issuance of other licences, but this never happened. The privatisation happened in 2007, nearly eight years after Kencell (now Zain) and Safaricom were licensed to offer mobile phone services. Thus until 2006 it existed as an old school operator bereft of funding to modernise operations and with a huge wage bill and other inefficiencies. If the government had allowed its successful privatisation first before issuing competing licences, Mr Hook says it would have already collected a considerable number of mobile subscribers.

However, at the time it was deemed fit to sell its mobile subsidiary – Safaricom – and gradually the Investment Act allowed for more foreign ownership, thus less government revenue. In any case, any profits due to government from Safaricom were used up to pay for what should have been its capital injection for network expansion in the days it owned 60 per cent. In the long run, Telkom Kenya and government did not make money.

Mr Ghossein, who joined the company last year, blames the Communication Commission of Kenya for condoning unfair competition, saying unless the industry regulator makes a swift move, the telecoms market will be hard to crack for small operators. “I term it a dangerous situation,” he notes, “and if the regulator doesn’t intervene, it will get worse.”

He says the country will witness a mobile phone monopoly unless the regulator further opens competition space. Telkom Kenya and Safaricom have been involved in a verbal war over the pricing of 3G spectrum, given that Safaricom had already paid $25 million demanded by CCK for a licence. While Telkom Kenya wants a reduction of the fee, Safaricom insists all players pay the same amount.

Mr Peter Wanyonyi, a telecoms consultant, says it is unlikely that Telkom would be listing any time soon, given the huge loss. “The size of the loss points to structural issues that would probably make it impossible to list,” Mr Wanyonyi said. He notes that smaller operators have to differentiate themselves to be relevant to this market – just offering voice calls will not help much, given that three in four Kenyan mobile users are on Safaricom.

However, Mr Wanyonyi says there are underserved market segments, such as data and value-added services like mms, music and video, in which they have a chance of upstage the market leaders. As part of the privatisation pact, a 30 per cent stake was to be sold through the stock exchange, in which France Telecom was to shed 11 per cent of this stake through an initial public offering (IPO), while the government was to sell a further 19 per cent stake.

Mr Ghossein has an uphill task to pull the firm out of the funk under the prevailing business environment. This year, he points to a good start, saying: “ When the France Telecom board approves the results we will announce them to you. They are better than last year.” With the poor performance of the Kenyan subsidiary, the French investors have quickly discovered that things are not fine.

Their hopes of listing Telkom Kenya on the Nairobi Stock Exchange were dimmed by this loss since a company must make profit for three consecutive years to qualify for listing. “They would fall foul of the consecutive annual profit rule. That will be the first hurdle,” says Mr Aly Khan Satchu, of NSE data vendor www.rich.co.ke. He says smaller operators need to deploy lean and mean rational models, which are not about being irrational and competing for market share.

“The product pipeline down a mobile phone is expanding at a rapid clip and there are opportunities for nimble players to outperform in niches,” Mr Satchu adds. The Frenchmen are now demanding a $385 million refund from the Kenyan government to compensate for what it calls disappearing assets and supply contracts that have a negative impact on its balance sheets. “The shareholders excluded me from the discussions, and hence I might not know every detail on the ongoing discussions,” says Mr Ghossein, obvious deflecting the pesky issue that has put the company on a collision course with government.

“But as promised by France Telecom CEO, he is increasing investment to Africa, and Kenya stands to gain from it.” If the government reimburses France Telecom – almost the entire purchase price – it would mean giving 51 per cent of Telkom Kenya away for free. The Frenchmen had bid for $100 million higher than the nearest competitor, possibly an indication that they had gone wrong in their initial assessment of either the market or the company they acquired.

Just like Essar, with its yu mobile brand and Zain, Telkom’s Orange had tried to launch a price war but no impact has been felt in the market. Zain Kenya seems to have gone quiet waiting for the next move after Indian telecoms tycoon Sunil Bharti Mittal paid $10.7 billion to buy Kuwait-based Zain’s Africa assets.

Bharti is anticipated to bring along a mass-market, low-rate model. However, this is exactly what Orange and yu have tried already, and not much money has been made. Last month, Telkom Kenya announced plans to shift strategy to focus on offering true broadband services, away from the over-dependence on the traditional voice services that are becoming saturated.

Before the Frenchmen injected in new capital to acquire 51 per cent of the firm, its average revenue per user (ARPU) amount target was $43, but as of 2009 results, the firm recorded only $19 from its fixed line clients, reflecting the downward pressure high competition in the telephony market has inflicted on revenues.

In the mobile phone business segment, Telkom Kenya takes home $1.8 in ARPUs from its customers. Compared to available ARPU figures from its competitors, Safaricom and Zain, who earn $6 and $4 per customer respectively, the low amounts indicate that the extreme competition in the voice market is already starting to impact on the firm’s bottom line.

Telkom Kenya is known locally as a sleeping giant. Mr Hook says Telkom Kenya still does have clout in the fixed market and can make a rapid turnaround in the present environment that allows unified licences. Its control of some backhaul links and potential to provide enterprise data services are yet to be exploited.

The firm has heavily invested in fibre optic cable in the country, such as the East African Marine System (TEAMS), the National Fibre Optic Backbone Infrastructure (NOFBI) and in April, providing the sole link for the East African Marine System (EASSy) for the region. [email protected]