New loans shine spotlight on Airtel, Telkom struggles

Telkom lines

Marketing executives hawk Airtel and Telkom lines to a potential customer outside the Kenya National Archives on Moi Avenue in Nairobi.
 

Photo credit: File | Nation Media Group

 A fresh round of loans to Airtel Kenya and Telkom-Kenya points to a heightening struggles facing the two telcos that only recently attempted a merger to boost their financial muscle.

The International Finance Corporation (IFC) on March 17 disclosed that it will invest Sh17.15 billion ($150 million) in Airtel Africa to support the telco’s capital expenditure and loan refinancing requirements in seven markets, including Kenya.

The global financier said its board of directors has approved the investment comprising up to Sh17.15 billion from its account and up to $44 million (Sh5.03 billion) in mobilisation from Managed Co-Lending Portfolio Programme to support Airtel Africa’s network investment as well as refinancing its existing loans.

On the part of Telkom Kenya, the State—which owns a 40 percent shareholding in the telco-- is set to hand it a Sh2.2 billion shareholder loan after MPs allocated funds to support the firm’s development programmes.

With the billions of shilling in new loans to Airtel and Telkom, the spotlight is back on the dire financial mess facing the duo which are going through barren times—posting financial losses and soaking up debt.

Airtel Kenya for example saw its losses double to Sh5.9 billion in 2020 from Sh2.78 billion in 2019 and is surviving on a series of shareholder loans from its parent company most of which it is unable to service.

In its financial filings, the telco revealed that the shareholder loans from its holding firm Bharti Airtel Kenya BV shot up to Sh52.2 billion in the year ended December 2020 from Sh46.6 billion the previous year due to additional lending, postponement of interest payment (capitalisation), and forex losses on the back of a weaker shilling. Telkom too is debt distressed and has over the past years survived on loans from its shareholders and lenders such as the European Investment Bank that in 2018 handed it a $40 million (Sh4.88 billion) facility to expand its mobile and data services.

Negative financials

Investors, however, seem to have faith in Airtel and Telkom and are looking beyond the present negative financials of the pair which are banking on improved fortunes once a reviewed connectivity tariff announced in December by the Communications Authority of Kenya (CA) is implemented.

For example, the planned cut of Mobile Tariff Rates (MTR) from the current Sh0.99 to Sh0.12 will save Airtel and Telkom in terms of MTR annual costs by Sh2.97 billion and Sh404 million, while Safaricom which has been receiving roughly Sh3.5 billion annually will be left with a paltry Sh106 million.

Appearing before Senate’s Information and Communication Technology (ICT) Committee last week, ICT Cabinet Secretary Joe Mucheru disclosed that the MTR applied for the past five years saw Safaricom make billions it should never have, while its competitors suffered huge unnecessary costs that affected their competitiveness.  “The (Communications) Authority analysed the potential impact of the reduction in MTR rates on the three MNOs revenues, using voice traffic patterns for the quarter ended 30th June 2021. Noting that termination rates are not meant to be income-generating streams but cost recovery mechanisms, the authority observed that due to the current imbalance in off-net traffic volumes, in a quarter, about Sh1.005 billion is paid out among operators as interconnection fees” he said.

“The net beneficially is Safaricom PLC that received Sh883 million while the net losers are Airtel Kenya and Telkom Kenya that payout Sh845 million and Sh115 million respectively,” the CS added.

Rival operators including Telkom and Airtel have been pushing for a reduction of the termination charge to enable them effectively compete with Safaricom in pricing promotions and special offers targeting voice segment.

Smaller players have for years argued that a higher MTR works in favour of Safaricom, which has 68.9 percent of the voice market and on whose network most calls terminate.

Safaricom, however, reasons that CA relied on a benchmarking methodology when bringing in the review, as opposed to long-run incremental costing which it argues is the preferred model in determining MTR. The dispute is before a tribunal for determination.

Missed opportunities

Away from the high hopes of a boost from the MTR review, Telkom and Airtel certainly rue the missed opportunities under their botched merge plans.

The basis of the merger announced in 2019 was the runaway success of rival telco, Safaricom. The plan was to merge the mobile, enterprise, and carrier businesses of the two firms to create what was to be a formidable company known as Airtel-Telkom to compete with Safaricom.

The Airtel-Telkom merger plans, however, went silent after Parliament reportedly warned the National Treasury against approving it.

The merge plans were also thrown into confusion after the Ethics and Anti-Corruption Commission (EACC) wrote a letter questioning the sale Telkom Kenya’s properties during the privatisation period.

High Court Judge Jairus Ngaa last February nonetheless gave the two telcos the greenlight to revive their merger plans and quashed the letter by the EACC saying the purported move by the anti-graft agency to recover property already sold or stop those on sale was illegal.

The court heard that the CA and the Competition Authority of Kenya had informed Telkom Kenya that they would only approve the merger once the transaction was cleared by EACC.

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