Complex Airtel-Telkom merger might not tilt telecoms market

Whether there is a realistic chance that we may, in the near future, get a mobile telephony operator capable of giving the vastly profitable Safaricom effective competition is the big question.

When I first heard that Telkom Kenya was to merge with Airtel, I thought we — at last — had a realistic opportunity of achieving a second national champion in the telecoms sector.

Yet, as the details of the proposed merger of these two unprofitable players trickle in, chances are beginning look more and more remote to me.

In a merger of two telcos, we usually expect two things.

CAPITAL INJECTION

First is new cash in the business by way of a capital injection into the merged entity. Indeed, the issue of fresh capital and capex are pertinent in the planned Telkom Kenya-Airtel merger.

Mergers that involve cash are what the mobile telecommunications sector in this country needs to get to the next level.

Secondly, when a merger is in the offing, the issue of infrastructure sharing will always be emphasised with the partner’s mobile companies touting the benefits of sharing things such as physical towers, real estate assets and spectrum.

Yet what I have gathered from impeccable sources is that the merger in the offing is neither going to involve cash nor the sharing of infrastructure of the two companies. In brief, this is how this complex transaction is structured.

ASSETS

First, take all infrastructure assets, mainly towers, and place them into a new company owned by the current owners of Telkom Kenya — Helios and the Government of Kenya, on a 60:40 basis.

Secondly, hive off all real estate assets owned by Telkom Kenya and place it into a new real estate company owned by the shareholders of Telkom Kenya.

Thirdly, create a pure Telkom Kenya mobile network operator.

All these three new companies are to be owned by a holding company owned by Helios and the government on a 60:40 ratio.

Finally, and once these three firms have been separated, merge the Telkom Kenya mobile operator business with the entire Airtel business on a 50:50 basis between the holding company and Airtel’s existing shareholders.

SHAREHOLDER LOANS

It is understood that in crafting the merger, a valuation conducted on both companies put Airtel at 15 per cent higher than Telkom Kenya. Since Airtel is contributing the entire business, the arrangement is that it will issue shareholder loans to the merged entity, repayable in four years. If in four years the government and Helios will not have repaid the loan, Airtel will take control of the combined entity. Enough of the boring details.

What we have here is a situation 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.

Yet if you looked at the two companies more closely, it would not surprise you that infrastructure is not being pooled. The truth of the matter is that Airtel has no towers to offer to the merged entity, having sold its own to an entity by the name Kenya Towers Company in 2015.

PROFITS

The audited accounts for that period reveal that, instead of the profits made in that big transaction being invested in the business, the money was all pocketed by the parent company under the guise of repayment of shareholder loans.

For its part, Telkom Kenya is in the middle of selling its towers under a sale-and-leaseback transaction in a deal dubbed, “Mnara”.

The plan is to complete the sale of the towers prior to the planned merger with Airtel.

And what public policy issues are at stake?

We must not forget that the taxpayer still owns 40 per cent of Telkom Kenya.

AFFORDABLE

We sold 51 per cent of the company to France Telecom in 2007, hoping that the taxpayer would get returns and that the public would receive affordable and quality services. But that has not happened.

In only a few years under the management of the French, Telkom Kenya had morphed into a beast that was forever demanding increased capital and shareholder loans from the taxpayer. By the time the French were leaving, the government’s stake in the company had dwindled to a paltry 30 per cent.

In the transaction where the French sold the company to Helios, the taxpayer ended up inheriting billions of shillings in shareholder loans. The Telkom Kenya privatisation of 2007 was a complete mess.

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