Orange exit set to rock telcom market

Relations between a French company and the government appear headed for the rocks in the wake of a recent announcement that the investor plans to ship out of the Kenyan market.

France Telecom and the government are joint owners of France Telecom which trades under the brand, Orange.

The Nation has learnt that the Cabinet Secretary for Information and Communications, Dr Fred Matiang’i, last week sent a notice to Orange informing it of his intention to terminate a lucrative deal under which Telkom Kenya manages a state-owned national fibre network on behalf of the government.

“I propose to terminate the contract on substantial public interest concerns and the future of ICT in Kenya,” said the letter.

Better known by the acronym NOFBI, and built by the government at a cost of billions of shilling, what is at stake is an extensive network covering many parts of the country, including locations where most of the fibre networks have no presence.

LEASING CAPACITY

Orange has been drawing revenues from the deal by leasing capacity to operators of data services, including competing mobile companies.

Granted, relations between the government and the French partner have not been placid lately, especially after the national assembly started investigating the controversy surrounding a December 2012 transaction that culminated in the government’s shares in the company being diluted from 49 to 30 per cent.

But two factors have combined to complicate relations. First, the un-anticipated announcement by France Telecom of its intention to exit has inevitably forced the government to take a fresh look at its relations with the partner. READ: Mobile babel hits high pitch as France Telecom mulls over exit

Secondly, with news of the planned exit coming in the wake of a notice by another investor, Essar of India, that owns the brand YU, that it was also leaving the country, the government has been forced into pondering the implications of these two new developments and what they mean for the industry in the medium term — in terms of both competition in the industry and the future flow of new investment. READ: Safaricom, Airtel splash Sh8bn for yu

The circumstances have left the two partners sizing each other, both sides battling to ensure that they leave the marriage at an advantage.

The French investor has indicated that they will exit Kenya and Uganda by the end of the year.

Although the shareholders’ agreement with France Telecom allows them to exit after five years, there is a rider that they must bring on board an investor of the same or superior financial muscle.

In the immediate period even as they plan to depart, their strategy is to keep the business going on minimum funding and activity.

The clearest indication of the short-term posture is the circumstances under which they have moved to cancel a 15-year multi million-dollar deal with the UK towers company— Eaton Towers.

Signed in June last year, Eaton was to expand the company’s base stations under a long-term lease. The French investor justified the plan on the grounds that it would save capex, lower the cost of managing base stations, while increasing coverage.

But recently, hardly nine months later, the French investor decided to terminate despite evidence that such a move was going to precipitate legal claims running into millions of dollars.

According to documents seen by the Nation, Eaton, which had by that time built 39 base stations has slapped a $21 million demand on Telkom Kenya.

When the proposal to terminate the 15-year deal was introduced, it divided the board down the middle with all Kenyan directors opposing it. The Kenya directors argued that it did not make sense to terminate a 15-year agreement after only nine months and at such a huge cost.

As it turned out, the French investor had its way. But whether the French will successfully manage to bring in a new investor to take over Telkom Kenya remains to be seen.

FINANCIAL HEALTH

The company’s financial health continues to be in dire straits. Last year, annual revenues dipped to Sh9.4 billion.

It made a loss of Sh9.1 billion. As a consequence, capital and reserves have gone down from Sh16.6 billion — when the balance sheet of the company was restructured in 2012 — to Sh7.5 billion in December 2013.

At a recent board meeting, it was resolved that the company should approach the two shareholders for nearly Sh11.9 billion to pay a loan owed to the France Telecom’s subsidiary, Orange East Africa.

In addition, the company has asked shareholders to provide Sh2.3 billion to finance its operations in the second quarter of the year.

And also hanging on Telkom Kenya’s neck like an albatross is a Sh3 billion Court of Appeal judgment in favour of former employees of Telkom Kenya, after a court battle known as the Ochanda case.

There are two other cases where the exposure is estimated at Sh2 billion.