France’s Orange announced last month that it is selling its 70 per cent stake in Telkom Kenya to equity fund Helios Investment Partners. This so far has been music to the ears of the Treasury. It had previously insisted it wanted a partner that understands Kenyan market dynamics, has a viable business strategy, and the technical and financial muscle to run the telco. This could have given Helios an upper hand over others.
In other words, in Helios, Telkom has found deep pockets, the right strategy and an understanding of the local market. But is Helios’ acquisition of Telkom Kenya a business turnaround or an opportunistic investment?
First, let us assess why an acquisition in Kenya is attractive.
The Economist and Time magazine have described Africa as the last frontier. In a frontier environment, opportunities are easy to spot and competition is almost non-existent. There are plenty of growth areas for investors. That’s why Helios has acquired Orange’s stake.
There are five typical business reasons companies merge with or acquire other companies.
1. Need for synergy: The most used word in mergers and acquisitions (M&As) is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to acquire another business that has complementary strengths and weaknesses.
2. Diversification/Sharpening business focus: A company may acquire another company in a seemingly unrelated industry to reduce the impact of a particular industry’s performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations.
3. Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it — instead, they buy a competitor’s business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller brewery, enabling the smaller company to make more beer and sell more product to its brand-loyal customers.
4. Increase supply-chain pricing power: By buying out one of its suppliers or distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs. This is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.
5. Eliminate competition: Many M&A deals allow the acquirer to eliminate future competition and gain larger market share.
Investor behaviour
So what reason applies to Helios?
The opportunistic reason — acquisition so that one can sell the business and make money in the process. But too confirm this, we need to understand Helios’ investor behaviour.
Helios is an Africa-focused private investment firm that operates a family of funds and their related co-investment entities, aggregating more than $3 billion (Sh306 billion) in capital commitments and pursuing a full range of investment types. The firm also managed the $110 million (Sh11.2 billion) Modern Africa Fund on behalf of investors, which included the US government’s Overseas Private Investment Corporation.
Helios leans more on being an opportunistic investor than a business investor. Because out of the five business rationales for acquisition — in as much as Helios could gain synergy — it seems to be more of a financial investor than a business one. Thus, this is more of an opportunistic investment than a business turnaround, which may mean it is not time for the Treasury to celebrate just yet.
The writer is senior lecturer in strategy and competitiveness, and academic director, MBA programmes at Strathmore Business School.
