KENYA GOVT MAY LET VTEL OFF 30% LOCAL STAKE AS IT CONSIDERS RULE CHANGE

Mergers, Acquisitions and Financial Results

The government of Kenya is considering abolishing the rule that stipulates that foreign companies investing in the telecommunication sector must allocate at least 30 per cent shares to nationals.

It is the government's response to the perennial disputes between local and foreign investors that have frustrated the conclusion of major telecommunications projects in the country, especially of late.

The East African has learnt that the Ministry of Information and Communication has already drafted a document with proposals for a more liberal regime for foreign investors. The developments come in the wake of a major falling out between the shareholders Vtel Holding Ltd - the company that only recently won the bid for a major telecommunications licence combining mobile and landline services - that has now plunged what was regarded as the most promising deal in the telecommunications sector in recent years into uncertainty.

V-tel won the highly contested licence, for which it bid an impressive Ksh12 billion ($169 million) - the single largest foreign direct investment in Kenya in decades. Well-placed sources told The East African that the government wants an arrangement where the 30 per cent local shareholding rule will be made optional, on the understanding that foreign investors have to sell the 30 per cent stake to the public through an IPO after a stipulated period.

Before the Dubai firm won the bid, the licensing of the second national operator to compete with the lacklustre Telkom Kenya - the country's sole fixed-line operator - had proved to be a messy affair mired in court cases leading to several postponements.

But hopes that the Vtel will hit the ground running seem to be fading after it turned out that its local partners are unable to raise their portion of the financial commitment.

In a development that is eerily reminiscent of the woes plaguing Kenya's third operator Econet Wireless, the dispute between Vtel and its Kenyan partners seems destined for the courts, where it is likely to take years to resolve.

Legal experts who spoke off the record to The East African trace the origins of the problem to a policy statement made by the government in 1997. In November of that year, the government published the "postal telecommunications sector policy statement," spelling out a new structure for the industry. It was this document that introduced the threshold for equity participation by local investors in privatised telecommunications companies.

Specifically, the document stipulated that "any company licensed to provide telecommunications services in the liberalised market should have at least 70 per cent of its equity owned by Kenyans." In subsequent years, to make the regime more friendly to foreign investors, the rule was revised to 60 per cent for foreigners and 40 for locals.

In the year 2002, then Minister for Information and Telecommunications Musalia Mudavadi published a gazette notice in which he changed the local equity threshold to 70 per cent for foreign investors and a minimum of 30 per cent for locals.

Another condition that has come to affect the process and which Vtel will have to deal with is the requirement that the shareholding structure of the winning bid's tender cannot be changed before the licence is issued. This, say experts, is what has seen the South African-based Econet Wireless Ltd locked in one case after another.

Sources tell The East African that Vtel was facing a crisis that emerged barely a fortnight after it won the tender, when it failed to formally submit its licence application.

It is believed that Vtel, a $1 billion holding company registered in the United Arab Emirates, which serves as the investment arm of the Palestinian Telecommunications Company (Paltel) in the Middle East, North Africa and Asia, could easily pay its share of the licence fees, but was being held back by its local partners.

Sources say the firm stated as much in a letter to the Communications Commission of Kenya (CCK) in which it sought an extension of the December 8, 2006 deadline for formally applying for the licence.

Subsequently, one of the local partners, Unitel, denied in a press statement that they were unable to raise their share of the licence fee.

Unitel's managing director Francis Makanga, insisted that the firm has the required funds. He said the company's documents were completed on time and are filed with the CCK and that it will have all financing ready for its shares by the time the licence fee is to be paid.

Vtel Holdings, the consortium's bid leader for the second national operator, had written to the Communications Commission of Kenya notifying their intention to drop its local partner owing to its inability to meet its share of financial obligations.

A profile of Vtel's local partners makes for intriguing reading. They comprise Kirinyaga Construction, a leading road builder in Kenya associated with tycoon Ephraim Maina; Unitel, which is said to be owned by the family of former District Commissioner Ben Makanga; Kusco, the umbrella body of more than 3,000 co-operatives; and businessman Michael Kirui, Nairobi lawyer Fred Ngatia and Fairacres Ltd coming in as minority shareholders. Loita Capital Partners International is the lead transaction advisor.

Sources say Vtel, in its letter to the CCK, was seeking the nod to drop its partners on the grounds that they were facing difficulties coming up with their share of the licence fees. The firm says it will not be able to submit its application with Unitel as its partner, raising fears that the matter could be headed for the courts.

Econet, has been involved in damaging feud with its local partners, the Federation of Co-operatives of Kenya and Corporate Africa after the two failed to raise their share of the licence fees, which saw the matter end up in court, where it is still stuck.

Vtel's imminent falling out with its partners has put paid to a declaration by its Chief Executive Officer Nour Atout that the consortium will roll out both fixed line and mobile telephony networks at the same time, making a record of sorts.

The pledge saw Telkom, Vtel's principal competitor as a national operator, declare it will also venture into the highly profitable cellphones sector, drawing immediate protests from its partner Safaricom, the region's most successful cellular phone company.

The East African