Government, Helios scale down investment in Telkom Kenya

Monday February 25 2019

Telkom Kenya Mombasa

Telkom Kenya Mombasa staff take photos with Mombasa Governor Ali Hassan Joho (centre) at their office in August 2018. Helios and the Kenyan government are reducing their stake in the telco. PHOTO | NMG 

ALLAN OLINGO
By ALLAN OLINGO
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JAMES ANYANZWA
By JAMES ANYANZWA
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British private equity firm Helios Investments and the Kenyan government have reduced their interest in troubled telecoms operator Telkom Kenya.

The ownership shift comes barely three years after Helios acquired a 60 percent stake in Telkom, hoping to turn around the firm’s fortunes.

The EastAfrican has learnt that Helios is offloading up to a 20 percent stake, while the Kenyan government wants to keep less than 10 percent shareholding in the new deal, that will see Telkom merge segments of its operations with Airtel Kenya.

The Kenyan government, with a 40 percent stake in Telkom, has significantly trimmed its investment in the firm.

People familiar with the ongoing negotiations said Helios and the Kenyan government could cede close to 51 percent of joint shareholding to Airtel Kenya — a subsidiary of Indian telecoms giant Bharti Airtel.

Telkom Kenya chief executive Mugo Kibati declined to comment on the deal, insisting that the matter “is very delicate and involves two parties.”
“I cannot comment beyond what is in the press release,” he said.

The change of ownership at Telkom Kenya comes after years of stops and starts, that has often been punctuated by ineffective competitive strategies and innovation plans that failed to excite the market.

Airtel Kenya and Telkom Kenya now hope the new entity coming out of the merger, Airtel-Telkom, will gain traction and deliver what each failed to do on its own. The quest is to create a stronger challenger to market leader Safaricom.

Merger
The proposed merger is, however, still subject to regulatory approvals, and is expected see the two telcos transfer their mobile, enterprise and carrier services businesses in Kenya to a joint venture company. Telkom Kenya’s real-estate portfolio and specific government services are however excluded from the combined entity.

Kenya’s continued shareholding is meant to protect its strategic asset, sensitive communications and state documents it is involved in transmitting.

News of the merger did not come as a surprise to followers of Telkom’s operations, coming after Kenya’s National Treasury had said improving the company’s performance would not be a walk in the park, even with the coming on board of a deep-pocketed investor.

“We are happy with the business plan,” Treasury Cabinet Secretary Henry Rotich said while unveiling the firm’s new corporate identity in 2017. “But it is difficult to anticipate when the company will be profitable and pay a dividend.”

Airtel is expected to pump in capital into the new operation in line with the shareholding it is about to acquire. The Indian telecommunications giant late last year raised $1.25 billion through a placement of shares to six global investors, and followed that up with another placement worth $200 million to Qatar Investment Authority.

Airtel has contracted several banks ahead of the planned sale of the African unit’s shares on the London Stock Exchange through an initial public offering later this year. The shares sale is expected to raise an additional $1.6 billion.

The Telkom-Airtel merger also comes at a time when the two companies have sold key assets, leaving them with a bare minimum.

Helios is understood to have recouped its investment, with the sale and lease back of Telkom Kenya’s 723 towers to American Towers Corporation.

Its new partner, Bharti Airtel, in 2017 exited the tower business altogether, after it divested from its tower company Bharti Infratel, a deal that helped cut its Africa losses.

Helios and the Kenyan government are also said to have separately registered ownership of the multimillion-dollar real estate holdings to be carved out of the merged unit.

Customers
For consumers, there is the expectation that the joint Airtel-Telkom operation will offer better services and compete effectively with Safaricom.

Over the years, Airtel and Telkom have failed to gain traction in the Kenyan market, largely because of their inability to match Safaricom’s substantial investment in its operations’ that allows it to lock customers in its ecosystem.

Safaricom’s capital investments average $350 million a year, compared with Airtel’s $10 million.

Analysts at Standard Investment Bank said sustainable competition in the telecoms market can only come from investment in the ecosystems.

They gave the example of Telkom’s mobile money platform T-Kash, describing it as having “a good angle towards simplifying payments without the inconvenient use of till/agent numbers.”

“The problem is, it's just a product currently, and large investments would be required to build the entire network from infrastructure to agents to merchants and to convince customers of its superiority,” said SIB.

Customers of the two telecom operators could however face increased voice and SMS services costs to support profitability in the short term, bearing in mind that voice and SMS are no longer competitive fronts for Safaricom.

A tariffs increase would require a careful balance to avoid a backlash from current on-net subscribers who may respond by switching networks.

“We estimate that the two revenue streams [voice and SMS] could be accounting for over 80 per cent of Airtel and Telkom service revenue [compared with Safaricom’s 48 per cent].

Price increases may not necessarily be through direct tariff increases but could also come in the form of less (voice minutes, SMS or data) for the current prices (certain packaged products),” SIB said.

Competition in the data market is what analysts say will be the game changer given that the three firms have various innovative products, and the Airtel-Telkom merger is expected to produce a formidable force against Safaricom.

SIB however warns that the overall evolving of Safaricom’s ecosystem will be a major challenge to penetrate unless the new entity comes up with unique and essential offers that are not available on the Safaricom platform.

“We do not expect a ‘collusive’ duopoly given the historical rivalry against Safaricom and the possibility of intervention by regulatory agencies. Competition will increase in this segment although Safaricom is investing heavily through mobile 4G and fibre to maintain the lead in coverage and quality of its data network,” the analysts said.

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