Revealed: How NIS stopped planned merger of Telkom Kenya and Airtel

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

What you need to know:

The planned merger of Telkom Kenya and Airtel Networks was blocked by the National Security Advisory Committee (NSAC) on grounds of risk to national security, The Weekly Review has established.

A meeting of NSAC held on October 28, 2019 came to the conclusion that the planned merger stood to compromise national security on the following grounds:

First, Telkom Kenya provides critical government communications services to the Office of the President, State Houses, the government data centre, the Ministry of Interior, the General Service Unit and the ICT Authority, including government hotlines, the Government Common Core Network that supports the Integrated Financial Management Information System (IFMIS) , and the Department of Defence’s restricted communications networks.

Secondly, Telkom Kenya’s data centres, data rooms and base stations manage critical security infrastructure, including carrier services, landing stations, undersea cables and meet-me rooms.

Consequently, the Head of Public Service, Joseph Kinyua, wrote to Cabinet Secretary for National Treasury and Planning Ukur Yatani, informing him that NSAC had reviewed the security implications of the proposed merger and directed that it be stopped.

The proposal had intended to have key assets in the deal, including Nairobi Telephone House, Mombasa Telephone House that contains the Meet-Me Room where undersea cable terminates in the coastal town, and another Meet-Me Room in Nyali, where another set of undersea cable terminates.

NSAC argued that the proposed merger would render government communication vulnerable to interception since the new joint venture company between Telkom and Airtel would not be under government control.

The committee pointed out that the Nyali and Mombasa Meet-Me rooms were especially critical to national security as they are the only points at which any cyber security action can be managed effectively.

The merger had major security implications because the current Telkom communication architecture does not exclusively demarcate Government of Kenya security communications infrastructure from the rest of the general network.

With the collapse of the proposed merger of the two financially-troubled mobile companies in 2019, the stage was set for the exit of the private equity firm, Helios Investment Partners, from the shareholding of Telkom in a transaction that has precipitated the return of the company to total state control and ownership.

Documents tabled in the National Assembly recently revealed that in a transaction steeped in secrecy and perfectly timed to happen in the last few days of former President Uhuru Kenyatta’s tenure, Helios Partners quietly offloaded its 60 per cent stake in Telkom to the government at Sh6 billion.

Indeed, the return of Telkom Kenya to the hands of the state represents one of the rare cases where a private equity fund exits from an investment by handing over the asset back to the original owner. In the majority of cases, the private investor exits after sweating the asset for a much longer period, then exiting either through sale of the asset to other funds or in the best case scenario, through an initial public offering.

Helios Partners’ exit from the shareholding of Telkom marks the end of a chapter of what ranks as the most grotesque privatisation fiascos in the country’s history. The taxpayer took all the losses while the private sector hogged the gains.

Sample the following: The government sold 51 per cent of Telkom to France Telecom for $390 million in 2007. And, in preparing Telkom for privatisation, the taxpayer spent much more money: The government wrote off billions of shillings in taxes that Telkom owed to the Kenya Revenue Authority. Hundreds of millions were incurred in fees to transaction advisers. After the privatisation, the government had to sink in more billions in shareholder loans that it extended to the company while it was under the management of France Telecom. More significantly, the privatisation of Telkom came at a high social cost to the country because 15,000 former employees had to be sent to the streets.

In November 2012, five years after selling the company to France Telecom, the taxpayer was forced to shoulder an even bigger burden when the government was forced to pay billions in recapitalisation and restructuring plan that entailed conversion of a Sh6.9 billion shareholder loan into equity and provision through the supplementary budget of 20112/2013 of an additional Sh2.4 billion towards recapitalisation of Telkom. In that transaction, the Cabinet also accepted that government shareholding in the company would be diluted from 49 per cent to 40 per cent in the even the government was not able to provide the Sh4.9 billion to fund the company in 2012. When the government failed to fork out all the cash, the state’s shareholding was diluted to 30 per cent.

Helios Partners, whose CEO is the Nigerian national, Babatonde Soyoye, stepped onto the scene in November, and tabled an ‘heads of terms’ to the National Treasury, which the private equity firm sought approval to buy of shares held by Orange Telecom in Telkom Kenya. Government approval had to be sought since the government had pre-emption rights over the shares in accordance of a shareholders’ agreement the parties signed in 2007.

Documents seen by the Weekly Review show that the conditions precedent for the transaction included a requirement that Helios provides evidence satisfactory to the government that it is a financial investor with an existing investment portfolio of a minimum of $300 million in value.

Perhaps more critical, Helios had to provide the government with a draft technical service contract with a telecommunications operator. In other words, the government was only ready to approve the deal on condition that the investor met technical conditions and team under which the company was sold to France Telecom, in the very first place.

There were several other conditions. Helios had to provide the government with a transition plan that is acceptable to the government for the technical, operational and brand agreement and arrangements in place between the company and Orange Telecom. In addition to this, the investor had to provide a business plan containing firm commitment on turning around the company and bring it back to profitability.

Finally, the parties agreed on a lockup period of three years. They also committed to support a future listing of the company on the Nairobi Securities Exchange.

Six years later, the performance of Telkom Kenya under Helios remain mixed. The biggest thing to happen in the five years has been asset-stripping activity. The biggest revenue earning achievements has occurred in asset- stripping and increased activity.  In 2018, Telkom Kenya offloaded Extelecoms House - the multi storey building on Haile Selassie Avenue - to the Central Bank of Kenya (CBK) at a consideration of Sh1.15 billion. A few months later, the company announced that it had sold 720 tower sites in a sale and lease back deal to the American Tower Company of the United States at a consideration of a whopping Sh16.9 billion.

Who was the real investor behind Helios? Although private equity firm do not usually disclose their investees, the practice is that they will name the fund. In the business plan Helios presented to the National Treasury, the acquisition was by ‘funds advised by Helios ad certain of its designated affiliates’. It did not enter into the transaction on its own name.

How much money did the private equity firm commit to spend on Telkom Kenya? Going through the business plan, Helios did not indicate plans to raise money to inject in the business. The money for the first phase of the business plan (five years) was to come mainly from two sources, namely, a loan of $75 million from France Telecom and sale of non-core assets-mainly property. In the second phase, the sources of funds were to external bank debts and additional shareholder loans. The business plan also stated that any equity would only be injected after the shareholders had exhausted borrowing options.

Helios indicated to the government very early that they had no funds to commit. France Telecom would continue to make profit from lending money to Telkom on non- commercial rates.