Telkom Kenya on the block – mobile licence sweetens the package

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Telkom Kenya looks set to receive bids to buy it on 14 September with a bid award being made on 25 September 2007, according to the Preliminary Information Memorandum that will be issued to bidders that Balancing Act has seen. This document describes in outline “the metrics” needed by potential bidders.

According to the Memorandum, in December 2006 it had “slightly less than 300,000 landline subscribers, with blended ARPUs of $40 per month.” This slightly less is actually specified as “under 280,000” later in the document. Its 174,000 post-paid customers represent 70% of the total post-paid market, both fixed and mobile.

In terms of existing Telkom Kenya capital plans, it says that a new service Telkom Wireless will be launched using a CDMA 2000 platform from Huawei at a cost of US$22.6 million. A fibre and microwave backbone based on IP is being rolled out and will cover all major commercial centres. The Mombasa-Nairobi fibre link is operational but the link to the Ugandan border is still being installed, supplied by Sagem at a cost of US$8.4 million. The carrier says its strategy is to be able to offer “a platform of converged fixed and mobile multimedia products.” Large-scale capital commitments already inked total US$40 million and stretch up to 2008, excluding EASSy commitments. Other fibre network commitments including EASSy ($5 million) total $27.5 million.

Before the sale takes place, the Government will unbundled the current Telkom Kenya shareholding in Safaricom (60%) and take it back into Government ownership. As the memorandum says:”This is with a view to liberating Telkom Kenya to compete directly in the mobile sector.” In addition, nearly two thirds of Telkom Kenya’s workforce (17,000) has been retrenched and these costs will be met directly by the Government rather than any future buyer. The cost of this overstaffing represented 50% of revenue. The document notes that:”Further savings on staff costs are likely.” Indeed, the Government makes several clear commitments to “clean up” the balance sheet of historic liabilities, particularly on pensions. The final workforce will be 3,200. A 40% stake in Postal Directories Ltd, a yellow pages joint venture with Portugal Telecom will be retained.

Telkom Kenya is closely involved as a member of the EASSy consortium but the document describes the Kenyan Government project TEAMS “as a contingency to guarantee Kenyan connectivity.” It also says that 85% of the funding for EASSy (US$170 million) will come from development funding institutions. It estimates that at least one of the several international fibre cable projects will be operational by Q1 2009.

On the revenue side, “there is evidence of serious revenue leakage due to the inadequate capacity for Call Data Records (CDR) from older generation switches.”It identifies future potential revenues from co-location but these currently only amount to $100,000 annually.

EBIDTA declined from a profit of $52 million in 2003 to a loss of $1 million in 2005. However, it claims that the unaudited accounts for 2006 show a $7 million profit, after a $24 million dividend payment to Safaricom to offset interconnect debt. However, the profit and loss figures show growing net losses between 2003 and 2005 with a reduction to US$6 million on the basis of the unaudited accounts for 2006.

Bidders are invited under two categories that are covered by different criteria. Category A bidders must have 500,000 voice subscribers and experience in the deployment of broadband services with a turnover of $200 million. Category B would be a financial investor with a minimum value investment portfolio of $200 million. It would take a minimum of a 35% shareholding.

According to sources close to the process, the ambition is to sell 51% of the company’s shareholding. The original plan was for the strategic partner to take 26% and the remaining 34% to be sold on the Nairobi Stock Exchange. But a listing requires 2 years profits on the balance sheet. But with only 26% sold, the company would remain subject to the State Corporations Act. Therefore the intention is to ask the Government to increase the amount sold to the strategic investor to 51%.