Kui Kinyanjui
1 March 2010
The sale of Telkom Kenya shares through the Nairobi Stock Exchange will spill outside the anticipated three years since its acquisition by France Telecom after it emerged that the unit recorded losses in the last financial year.
Under Kenya's listing requirements a company needs to have made profits for at least three years and Telkom Kenya's failure to return a profit in the first full year of operation under the French firm means it cannot meet this criteria until 2014.
Under the terms of the sale of the company's majority control to a consortium involving France Telecom and Alcazar Capital, the integrated telecommunications services provider was to be listed within three years at the earliest.
France Telecom's 2009 financials show that the French company lost Sh10 billion in its Kenyan operation in the year under review.
"Telkom Kenya generated revenues of Sh11 billion over the full year 2008. Telkom Kenya's net income was Sh(10) billion," said the company in its results released last week on Thursday.
The amount includes losses of Sh300 million of amortization of identified acquired assets (net of deferred taxes reversals) and Sh5 billion losses due to goodwill impairment.
France Telecom also noted in its results that the sale price of Telkom Kenya reflected residual goodwill amounting to Sh16 billion, meaning the company was effectively worth Sh11 billion when it was sold in 2007.
France Telecom says the goodwill was mainly attributable to the company's launch of mobile operations in Kenya and to synergies between the fixed-line and mobile businesses where Telkom hopes to carve a niche for itself in the data market.
Following its consolidation into the group, France Telecom also removed Telkom Kenya from its "assets available for sale" category in its financial statements.
Kairo Thuo, a director at financial consulting firm Viva Africa Ltd, says accounting standards require a company to classify an operation as an "asset available for sale" if it has no controlling stake in that firm.
The group's financial statements reveal that the France Telecom led consortium's total share-holding of 51 per cent is split between France Telecom and Dubai based Alcazar Capital, with the former owning a 78 per cent share while Alcazar has 21 per cent.
This means France Telecom effectively holds a 40 per cent direct interest in Telkom Kenya while Alcazar Capital Limited, a consortium partner in the 2007 purchase of the Kenyan fixed line operator, holds a 10.9 per cent stake.
In 2007, the consortium acquired a 51 per cent stake in Telkom Kenya, the incumbent Kenyan telecom operator, for Sh26 billion.
The government currently owns the remaining 49 per cent in the firm.
The release of depressed earnings means Telkom Kenya will not meet NSE listing criteria that dictate that any company willing to list must be profitable for three consecutive years before it can trade on the exchange.
Upon listing it was expected that Telkom Kenya shareholding would shift, with France Telecom and the public holding 40 per cent each, and the government 20 per cent.
Following its privatisation in 2007, France Telecom was expected to engineer the company to become a profitable firm in the next three to five years in preparation for its public offering.
But the company has met with stiff competition in the form of three other players in the mobile telephony market namely market leader Safaricom, Zain Kenya and Essar.
Although the company managed to recruit two million subscribers to its mobile service in 2009, its revenues were dented by shrinking profit margins on voice tariffs.
"We did not meet our internal targets for growth last year due to stiff competition in the sector. We plan to revamp our offering to focus on providing quality services to the market, especially on the data side," said Mikael Ghossein, Telkom CEO in a former interview.
In 2009, Telkom Kenya was forced to retract its launch offer of Sh1 inter-network calls as it struggled to gain the optimal number of subscribers to sustain its low pricing model.
During the year under review, it launched a comprehensive suite of products aimed at leveraging its large infrastructure footprint and made formal in-roads into creating data solutions for home and small business users.
The company spent Sh18 billion on its network in the period under review, which was spent boosting its presence in the GSM and CDMA markets.
But Telkom was also forced to deal with rising attacks to its fibre network, which cost the company Sh2.5 billion in maintenance and revenue losses of its expanding terrestrial network.
The company has also complained that the fee attached to obtaining a 3G licence - a technology seen by analysts as critical for mobile companies wishing to enter the mobile internet field - is too high, and is lobbying the government to lower the licence fee.
Meanwhile, France Telecom also posted depressed earnings, returning consolidated revenues of 45.944 billion euros, down 1.8 per cent on a comparable basis to last year.
The firm's restated EBITDA of 16.327 billion euros with a margin of 35.5 per cent, a decrease of 0.5 points on a comparable basis, however the company noted that it had marked 5.8 per cent growth in Africa and the Middle East.