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TMCNet:  Secret Treasury-France Telecom Talks Over Telkom

[April 13, 2010]

Secret Treasury-France Telecom Talks Over Telkom

Nairobi, Apr 13, 2010 (The East African/All Africa Global Media via COMTEX) -- The first phase of negotiations over the $385 million claim France Telecom has slapped on the government of Kenya has ended in Nairobi amid total secrecy and even as it emerges that the French have now informed the government that they may pull out from Telkom Kenya if the matter is not resolved.

"The Frenchmen have made it clear that their future investment plans will be jeopardised if Telkom Kenya does not recover within one year," said a source familiar with the negotiations.

In a bare-knuckle negotiating strategy that is not typical between foreign investors and their sovereign hosts in Africa, it is understood that France Telecom has expanded the scope of its claims against the Kenya government.

The firm is now not only demanding that it be refunded an amount that is equivalent to what it paid for a controlling stake in the struggling telco, but it also wants taxpayers to fund its business plan over the next five years with a cash injection of over $300 million.

Sources familiar with the negotiations told The EastAfrican that in addition to the original $385 million claim, France Telecom has lodged an additional claim of $30 million.

This is based on the grounds that a multimillion shilling supplier contract that Telkom Kenya's management signed with Rapid Communications was done hardly weeks before the French took over.

This denied France Telecom a chance to negotiate a deal under whose terms it would inherit future debts.

This high stakes dispute is likely to leave the government saddled with a massive pending bill - with the tab now running up to $680 million - to be absorbed through the national debt, with the potential of disrupting government spending plans in major ways.

Indeed, the massive size of the pending bill is itself bound to generate political undercurrents, considering that two and a half years ago, parliament allowed the government to absorb nearly $1 billion worth of Telkom Kenya debts to ready it for sale to the private sector.

Now with these demands, which amount to reversing the privatisation of Telkom Kenya, the Treasury could soon be embroiled in a political storm with parliament.

The French firm has also launched a scathing attack on its rival Safaricom, demanding that its market dominance be whittled down and sweetheart regulatory favours be withdraw, for example by dropping the $25 million fee for 3G licenses to give other players such as itself, Zain and Essar room to make money in Kenya's highly competitive mobile phone market.

Apparently, the French have been quietly lobbying the government to improve the competitive environment, which they say is skewed in favour of Safaricom.

The Frenchmen have complained that high inter-connect charges prevent consumers from switching between networks as happens in more modern markets.

In a recent interview with The EastAfrican, Michael Joseph, chief executive of Safaricom, dismissed France Telecom's claims, questioning the firm's business savvy.

"Before they came to Kenya, they must have studied the market and seen that we were market leaders then as we are today. What has changed?" asked Mr Joseph, adding, "Nobody forced them to come here, they paid more than everyone else. They knew the environment. We should not be taken down because they are not successful." As for the 3G licence fee, Mr Joseph says: "I took a business risk and I was successful. The competition said 3G was not for Kenya, but I believe in this market and this country." Another major item on the French Telecom claim is with regard to contracts with the Chinese company, Huawei Tech Investment Company, the entity which installed the CDMA network on behalf of Telkom Kenya.

In what now appears as an admission that France Telecom is unable to turn around Telkom in the face of Safaricom's market dominance, the company is calculating that it will need a capital injection of over Ksh20 billion ($266 million) in the next three years to expand and improve its network.

It has therefore demanded assurances that the government agree to pump more money into the financially weak company either in the form of shareholder loans or fresh capital.

The government still owns 49 per cent of Telkom Kenya, which it hoped to exit through an initial public offering (IPO) on the Nairobi Stock Exchange. Now that is looking increasingly doubtful.

Kenya's sour relations with France Telecom follow a trend in East Africa that have seen other nations like Tanzania go through similarly messy privatisation of their telcos and other key utilities.

Tanzania has ended up taking back the assets after foreign investors failed to make TTCL and the railway commercially viable private owned businesses.

In Kenya, just as is the case with Kenya Railways, the privatisation of Telkom is turning into another headache that is starting to preoccupy Uhuru Kenyatta's Treasury even before it begins to implement its privatisation timetable for firms such as KenGen, East African Portland Cement and National Bank of Kenya.

Second thoughts? A leading European telecommunications operators, France Telecom has claimed it is not able to trace a chunk of the assets that were on the books of Telkom Kenya at the time it was acquiring a 51 per cent stake in the former parastatal from the government in December 2007.

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

Such has been the secrecy surrounding the negotiations over the huge claim by France Telecom that top Treasury officials who are leading the negotiations on behalf of the government have not been willing to reveal to the press even mundane facts about the negotiations such as the law firm representing Kenya, the names of institutions participating, even the venue of the meetings.

It is too early at this stage to predict how events are likely to unfold. But the stakes are high indeed -- because what is happening right now could easily unravel what is touted as the most successful privatisation deal in Kenya in term of revenue, yielding as it did $390 million in receipts.

Kenya's position in the negotiations is that France Telecom was given ample time and opportunity to conduct a due diligence before committing to buy Telkom Kenya.

As part of preparations for the sale, all the information about Telkom Kenya, including assets and audited accounts for five years, was deposited in a data room to which only interested bidders were allowed access.

As early as March 2007, the IFC who were the transaction advisers, put out bids for expression of interest.

Only companies who qualified at this stage were allowed access to the data room.

They were: France Telecom, Telkom South Africa, LAP Green Network of Libya, Reliance Telkom of India, Alcazar of Dubai, MTNL of India, Sudan Tel of Khartoum and VSNL of India.

Eventually, France Telecom, coming together with Alcazar, won the deal with an offer of $390 million.

The second best offer of $282.8 million came from Telkom South Africa. Reliance of India offered $221 million.

According to the way the privatisation deal was structured, the first phase would involve the unloading of 51 per cent shares to the winning bidder - with the government retaining 49 per cent.

In the second phase, which had to take place between the second and fifth anniversary of the coming in of the strategic investor, the government would offer 19 per cent of its remaining shares to the public through an IPO - thus scaling down its stake to 30 per cent.

The strategic investor would be required to concurrently reduce its stake to 40 per cent during the IPO.

Given Telkom Kenya's present financial state, it is unlikely that this grand plan will be achieved at all. Its balance sheet is such that it is not even able to raise money from the local capital markets.

Whether the government will want to pump money into the company in the context of a modernising, expanding and competitive private sector - and in view of compounding demands for scarce budgetary resources - remains to be seen.

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