A consortium that includes British Telecoms and Libyan investors has emerged as the only strong contender to acquire a strategic 40 per cent shareholding in Telkom Kenya. People close to the matter told the Business Daily that senior officials from BT and Libyan investors on Friday met top Treasury and Ministry of Communication officials to work out the deal’s finer details. Treasury estimates the stake to be worth Sh5.6 billion —meaning that Telkom Kenya is now valued at Sh14 billion.

The British firm is said to have tabled a number of proposals, including a strong financial bid as commitment to finance the turnaround of Telkom Kenya, in the meeting that ended at 11.30 pm. Such a high level leak means that the Government is doing its best to talk up the price that will be paid for Telkom Kenya.

“The consortium led by BT is the team to beat. They have  a credible technical group and have the finances,” an official, who attended the meeting, said. It is the second time that the Government is trying to sell a significant portion of its stake in Telkom Kenya, the first attempt having flopped after bidders placed financial bids that they ultimately could not back up with real money.

The Government had this time around included a condition that required bidders to have an annual revenue of $200 million (Sh14 billion), more than 500,000 voice subscribers and demonstrated experience in the deployment of broadband to avoid similar flops.

In recent months, Libyan firms, loaded with petrodollars, have been clinching lucrative deals in Kenya mainly on the infrastructure front including the upgrade of Kenya Petroleum Refineries. This has cemented close trade ties between Kenya and Libya that was recently pushed by President Kibaki’s official visit to Tripoli.

The Government intends to sell its 40 per cent stake to a strategic investor who is expected to come on board before the end of the year. Analysts say that BT has been desperate to get a foothold in the lucrative Eastern African market through an acquisition, a pointer that the Telkom deal would turn their dream true.

Already, BT is well represented in the rest of the continent with its regional headquarters in South Africa to the Southern part of the continent. For the North African market, it has the Libyan office and the Nigerian office to serve the West African market.

“Safaricom has shown there is money to be made in this part of the world and everyone is now looking at getting a share of the market,” James Rege, chairman, Capital Real Time, a telecommunication consulting firm.

Safaricom broke its earlier record to emerge as the most profitable firm in the East Africa posting Sh17.7 billion in profits, an increase of 39 per cent recorded a year earlier.

With Telkom already in the wireless voice market through their new service offering dubbed Telkom Wireless, which is set to be officially launched this Thursday, this could be big opportunity for BT to take a stab at a growing market.

Rege, a former permanent secretary in the information ministry, said BT looked the most credible firm to clinch the deal should it come through. This is not the first time the British telecommunications giant has made a bid at Telkom Kenya. Six years ago it indicated its interest in acquiring the state firm but it was disqualified during the preliminaries.

Other firms that are in the race to buy the stake include Indian mobile service providers Bharti Airtel, Reliance Communication, Tata Holdings and Vtel communication, who had won the licence to become the country’s Second National Operator but were disqualified after failing to raise the required license fee.

American telecommunication giant AT&T pulled out of the race after the Government failed to buy into its demand where it indicated it would only buy a stake in the state firm if they were given a 51 per cent stake. This, they noted, was the only way they could get a free hand to turnaround the loss-making company.

South Africa-based Econet is also making a second attempt to enter the Kenyan telecommunications industry having won a licence for the third mobile phone operator that is subject of litigation. The recent attempt has seen potential bidders demand that the Government increases the 26 per cent stake it had initially planned to sell for them to consider the offer. But this has since changed as the stake to be bought by the strategic partners has been increased to 40 per cent and the government holding will stand at 49 per cent.

The remaining 11 per cent will be reserved to be sold to the public through the Nairobi Stock Exchange. Telkom is currently deemed to be unable to pass the Capital Market Authority (CMA) listing test. CMA regulations require that any firm keen on listing at the NSE must have posted profits for at least three in the five years to the listing.

But Telkom Kenya has been making losses for years, weighed down by huge staffing levels and growing competition from the wireless voice market.

Figures sent to the potential investors show that Telkom financial performance has been declining over the last four years.

Its turnover has been declining at an annual rate of 10.5 per cent over the last three years as competitors eat into its market share to settle at Sh16.3 billion in 2006 from Sh20.9 billion in 2003.

The firm notes that it expects to make a loss of Sh1.18 billion, which is a reduction from last year’s figure of Sh2.7 billion.

While the special shares reserved for the public will be held in trust by the Government, dividend payouts from Telkom Kenya will stream straight into the State coffers.

According to Dr Bitange Ndemo, permanent secretary Ministry of Information, the revision had been informed by the need to go around the State Corporation Act in a move that was aimed at making the deal more suitable to strategic investors.

Had the strategic investor held a minority holding at 26 per cent and the Government holding a 64 per cent stake, Telkom Kenya would not run as a private company, but under the Act which guides the operation of parastatals.

At the moment the government is racing to clean Telkom debt ridden balance sheet as it prepares to bring the strategic partner on board as well as strike a better deal in the sale of the 40 per cent stake. The Government has already committed Sh26 billion to fix the pension and tax arrears with pensions taking Sh10 billion and the remaining Sh16 billion being taken by Kenya Revenue Authority. To keep the state firm afloat, the firm is set to complete a massive staff layoff that will reduce its work force to 3, 200 members down from 17, 000 by the end of August.

According to Permanent Secretary Bitange Ndemo, BT have also expressed interest in investing in the TEAMS fibre project.

(SOURCE: Telegeography)