France Telecom Demand for U.S.$385 Million Compensation Over Telkom Kenya's 'Vanished' Assets

Mergers, Acquisitions and Financial Results

France Telecom will start negotiations with the Government a sum in compensation almost equal to the purchase price of the company because it says that it is not able to trace some of the assets that were on the books of the former parastatal at the time it was put on sale.

The company now wants the government to compensate it to the tune of a massive $385 million - an amount almost equal to what the French company paid for its 51 per cent share of Telkom Kenya.

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

Did unscrupulous individuals grab assets of Telkom Kenya between the time the data room was established and the time of the actual sale of the company to France Telecom? Is the French company to blame for not having conducted a proper due diligence before signing on the dotted line?

These are the pertinent questions at the heart of a dispute that has cast doubts on the integrity of one of the largest privatisation transactions in the history of Kenya, in which the government pocketed a whopping $390 million - the largest sum ever obtained from the sale of shares of a parastatal to a foreign investor.

Both sides are still tightlipped. A party who was involved in the transaction for France Telecom told The EastAfrican that actual negotiations between the government and the French company were yet to begin - pointing out that the view of his side of the divide was that the matter should be kept away from the media attention for now.

An e-mail with questions sent to France Telecom's Michel Barre, who was reportedly visiting Nairobi to engage the government on the dispute, went unanswered.

Neither did the government side want to release the details of the dispute. But sources have confirmed to The EastAfrican that the government side has gone ahead and engaged a Nairobi law firm to lead the negotiations with France Telecom. Negotiations begin in earnest on March 21.

Aside from assets that the French company claims have disappeared from Telkom Kenya's books, it is also accusing the government of non-disclosure of material contracts at the time of the transaction. The French claim that after taking over, they stumbled on supplier contracts with huge liabilities that had not been disclosed in the data room at the time of the transaction.

More questions: Did some people in Telkom Kenya rush to commit the company to opaquely procured supply contracts between the time the data room was opened and the time France Telecom took over?

Second, the French have reportedly made claims questioning the integrity and accuracy of Telkom Kenya's audited accounts that were lodged in the data room at the time of the transaction.

Third, France Telecom is accusing the government of non-disclosure of material information with respect to tax liabilities, uncollectable debts, suspense accounts and unreconciled bank accounts.

Technically, the claims by the French are based on what is referred to in legal parlance as warranties -- a situation where a party is allowed to claim monies from the seller of an asset if it turns out later that all facts were not fully disclosed before the transaction was concluded. Apparently, the share purchase agreement signed between the government and the French company issued a number of warranties.

How the tussle turns out remains to be seen. But sources who understand the transaction told The EastAfrican that in cases where the government gave clear warranties such as the pension fund liabilities and tax arrears to the Kenya Revenue Authority, it is likely to agree to paying up.

"That agreement does not have warranties against the accuracy of financial accounts," said the source, pointing out that France Telecom cannot turn around at this stage and take issue over matters it should have questioned at the time it was doing due diligence on Telkom Kenya.

Indeed, opinion among experts who were involved in the transaction is unanimous that the claim by the French is excessive. "How can they claim $380 million when they paid us $390 million? Did we give Telkom Kenya to these French people for free?" asked a local investment banker who had been hired by one of the bidders as an investment adviser to the transaction.

The East African