Who is fooling who in the Telkom Kenya sale saga?

The Treasury and France Telecom in 2007 promised that, at worst, they would by now be selling a third of a profitable Telkom Kenya to the public.

The arithmetic was simple; France Telecom, having bought a 51 per cent stake at Sh26 billion, would give up 11 per cent and the government would cede 19 per cent of the 49 per cent it retained, thus meeting the 30 per cent minimum threshold to list a company at the Nairobi Securities Exchange.

The main task lay with France Telecom, which was to provide a management team capable of making a turnaround to one of the country’s worst managed parastatal. The two partners were then to inject funds to finance the turnaround.

A lot has changed since, unravelling the promised road map to privatisation.

Instead France Telecom seems to be the only party that has benefited, with the public having little to show for the deal.

A controversial restructuring deal struck last year has diluted the government’s stake to 30 per cent and raised Orange’s share to 70 per cent.

“This looks like a very well calculated plan to fleece the people of Kenya,” Public Investments Committee (PIC) chairman Adan Keynan said during a hearing last week. 

The PIC is investigating how the restructuring was done and its legality in what the MPs term collusion between the National Treasury and Telkom Kenya to rob the government of its shareholding in the mobile operator.

France Telecom bought into the state firm jointly with Alcazar Capital Limited, which held a 15 per cent stake.

Alcazar Capital later relinquished its stake to Orange.

BEST PRIVATISATION DEAL

It is a sad turn to what had been praised as the best privatisation deal ever carried out in Kenya.

Notably, France Telecom had paid Sh6 billion premium above what the government’s transaction adviser, the International Finance Corporation (IFC), had quoted as the market valuation of the state corporation.

At the time of the privatisation, Telkom Kenya had accumulated various debts, including the firm’s pension fund amounting to Sh10 billion, unpaid taxes to the Kenya Revenue Authority at Sh36.3 billion, and a syndicate of bank loans of Sh5.8 billion.

To clear the debts, the Treasury gave Telkom Sh64 billion to restructure its balance sheet. “We want to hand over a company with a clean balance sheet,” said Investment secretary Esther Koimett.

Despite this, by June 30, 2012, Telkom Kenya had accumulated debts of about Sh48.4 billion, mainly from France Telecom. 

It is the attempt to clear this debt that has triggered an outcry, with accusations that the government is getting the short end of the stick. 

Disputes started in April 2010 when France Telecom surprised the government with a threat to pull out, claiming material concealment of facts when carrying out due diligence.

MONEY BACK DEMAND

France Telecom also claimed that it was not able to trace some assets that were in the books of Telkom Kenya at the time it was acquiring a 51 per cent stake in the former parastatal in December 2007.

The company also based its claim on the grounds that it had come across supplier contracts that it did not know about at the time of taking over the management of Telkom Kenya.

Part of the demands were that France Telecom wanted a refund of the Sh26 billion it had paid to acquire its stake and an additional Sh2.5 billion ($30 million).

Threatened with insolvency following years of operating in the red, the board of Telkom Kenya in December 2011 called on the two shareholders to inject funds to enable the company to meet its financial obligations.

Subsequently, France Telecom and the government held lengthy discussions, seeking to find a lasting solution to the challenges facing the company.

According to the Treasury, the discussions largely covered the development of a sustainable business plan for 2012-2016 and balance sheet restructuring to bring the company back to solvency.

“There were only two options — either to liquidate the company or restructure its balance sheet.

An agreement was reached to provide financial support to the company for 2012 and to restructure the balance sheet,” the Treasury said in its submission to the PIC.

The two firms also agreed to convert their debt into equity, a process that cut the government’s stake from 49 per cent to 40 per cent after Orange wrote off debts worth Sh33.5 billion.

It is not clear how the debts worth Sh33.5 billion were equated to a 9 per cent shareholding in the company.

And unlike the privatisation process, where IFC was appointed as the transaction adviser, this time round, despite the fact that the process would result in a change in shareholding structure, the government did not bother to seek advice from any financial services provider.   

Further, to finance its operations for 2012, the company required Sh10 billion to be contributed according to the shareholding structure before the restructuring process began.

RESTRUCTURING

The government was, therefore, required to raise Sh4.9 billion while France Telecom was required to raise Sh5.1 billion.

While Orange met its part of the deal, the government had only paid Sh2.5 billion by December 2012, when the company’s books closed.

“Given that the government had only paid half the amount, in order to deal with the risk that it may not be able to provide the remaining Sh2.4 billion, the two shareholders agreed its stake would be diluted further to 30 per cent in the even it fails to pay the balance,” Treasury Secretary Henry Rotich, accompanied by Ms Koimett, told PIC last Thursday.

The government was given a grace period until June 30, 2013 to raise the difference to recover the lost 10 per cent.

However, the period lapsed without the government honouring its part, effectively losing the stake permanently.

The House committee took the position that corrupt parties in Treasury agreed to the deal without any intention of paying the difference, given the financial position of the country.

“The Treasury signed the deal well aware of the financial constraints that faced the country between December and June. I don’t think there was any intention by those officials who signed the document to pay the money by the set deadline,” PIC vice-chairman Kimani Ichung’wah said.

The committee is also grappling with the valuation model used to equate the Sh2.4 billion the government was to raise to a 10 per cent shareholding of the company, given that Orange had to write off debts worth Sh33.5 billion to just get 9 per cent stake.

The MPs charged with safeguarding the government’s investments also took issue with the fact that Treasury never bothered to include the Sh2.4 billion difference in the supplementary budget despite being aware that failing to pay would cost it a 10 per cent stake in Telkom Kenya.

Although Treasury says it is willing to re-negotiate the deal in order to get back its stake, at least for now, the public can forget the dream of owning shares in the mobile firm.

The matter resurfaced last week when officials from France Telecom and the Treasury appeared separately before PIC.

Both officials admitted failing to involve either the Privatisation Commission or the Communications Commission of Kenya in the process, raising questions on the validity of the deal.

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What raises eyebrows over deal

The agreement was concluded at a time when government had frozen all transactions valued at over Sh500,000 pending transition to a new government.

However, Ms Koimett, who, together with the then Treasury permanent secretary, Joseph Kinyua, (right) signed the deal on behalf of the government, said failing to involve CCK was “a mistake” while the fact that there was no sale of shares in the dilution process negated the need to involve the Privatisation Commission.

Further, she said, the duty to inform CCK of the restructuring should be taken by the licensee —Telkom Kenya — and not the shareholders.

“The restructuring proposal was approved by Cabinet on November 22, 2012 and the agreement was cleared by the Attorney General on December 20, 2012.

That was before Treasury appended its signature,” said Mr Rotich.