Mergers, Acquisitions and Financial Results

Cash-strapped Kenyan incumbent Telkom Kenya has been given the go-ahead to raise a considerable sum to bail it out after Vodafone gave the Kenya Government the go-ahead to offer a portion of its shares for sale. The company claims that it will be able to service the loan once it has got rid of 6,000 employees, considerably less than was originally proposed. Given its existing level of debt, the only strategy the company can have is that it will trade its way out of its current difficulties.

A syndicate of local commercial banks have just concluded the final stages of putting together a $80 million loan to the financially troubled Telkom Kenya to finance the second phase of retrenchment, which is expected to affect some 6,000 employees.

The largest loan by a local bank to a parastatal, the facility will be repayable in one and a half years. Included in the syndicate are Stanbic Bank, Barclays Bank, Standard Chartered and the Kenya Commercial Bank.

It is the second major loan to be advanced by local banks to the telecommunications sector. Last year, a syndicate of local banks advanced $160 million to mobile telephone company Safaricom Ltd to finance expansion and rehabilitation of existing infrastructure.

Since Telkom's balance cannot secure a loan of that size, Telkom has pledged 9 per cent of the shares it holds in Safaricom to guarantee the loan. The arrangers of the loan are convinced that Telkom should be able to service the loan from its cashflow once it sheds the 6,000 employees. It is estimated that once the lay-offs are effected, the company will be able to save an average of $3 million a month, which can then be used to service the $80 million facility.

Whether or not the facility will be disbursed will, however, still depend on a nod from Vodafone Plc, which - under a shareholders agreement signed in the year 2000 - has a first-right-of-refusal over the shares. The EastAfrican has learnt that the locals banks have made it clear to the government that they will not release the money without Vodafone's approval.

Vodafone - currently involved in negotiations with the government for its 9 per cent share, is likely to see an opportunity to press the government for concessions in its bid for more control of the company. A team from Vodafone is expected in Nairobi this week to continue the negotiations.

Although the first set of negotiations between the parties did not yield much, it is unlikely that the British company will want to block the $80 million facility to Telkom and risk bad blood with its partners.

Still, the company will want an arrangement that will allow it to take control of the most profitable business in Kenya.

Thus, its strategy will be to give concessions to the government depending on how much the government is prepared to give in return.

What remains contentious is the price the British company will want to pay for 9 per cent of Safaricom. Lately, the rhetoric coming especially from Ministry of Information and communications officials has been more and more strident, suggesting that the government is prepared to start negotiations with third parties in the event that talks with Vodafone fail.

Communications Minister Mutahi Kagwe has also overruled the possibility of an Initial Public Offer (IPO) by Safaricom. Yet indications are that for progress to be achieved, the parties will need to leave all options open. Experts say that an IPO may just be the best way of resolving the disagreement over the pricing of Safaricom shares.

The East African