Failed Airtel Kenya and Telkom merger leaves telcos limping

Airtel Kenya and Telkom merger collapsed at the last minute after months of negotiations. [File, Standard]

When Airtel Kenya and Telkom Kenya announced plans to merge operations to take on market leader Safaricom two years ago, the deal was seen as key to the future survival of the two firms.

However, the merger collapsed at the last minute after months of negotiations primarily because the National Treasury, a majority shareholder in Telkom Kenya, withheld support.

Reportedly, Treasury failed to issue a letter of intent to Telkom Kenya and the Communication Authority of Kenya (CA), which eventually sunk the proposed merger. Aside from withholding the letter of intent, the State excluded key Telkom Kenya assets in the proposed merger, which weakened the value of the telco in the face of any prospective suitors.

Just over a year after the deal fell through, the impact is beginning to hit home, with both firms facing an uncertain future. And mobile subscribers remain the biggest losers as the two telcos have, as separate entities, failed to mount any serious competition against Safaricom, which continues to grow in leaps and bounds.

An analysis by Financial Standard on the two firms’ financial reports and industry data indicates they are on the edge of a precipice.

According to Airtel Kenya’s latest financial report, the company made losses of Sh5.9 billion for the year ended December 31, 2020, more than double the Sh2.7 billion reported in the previous year.

This has pushed the firm’s accumulated losses to Sh77.4 billion as of December 2020, putting it in a net liability position of Sh43.7 billion.

Airtel Kenya further has Sh52.3 billion in shareholders’ loans, which the management says are enough for the liquidity necessary to maintain operations.

“After considering shareholder’s loans, there is sufficient liquidity to manage operations,” said the firm in a note to shareholders accompanying the financial statements. “Further, the unit has shown buoyant growth over the last three years with growth in revenue and reduction in net losses.”

According to data from the industry regulator - Communications Authority of Kenya (CA) - Airtel Kenya had 17.3 million subscribers as of June 2021, a 13 per cent growth compared to the previous year.    

However, with Kenya’s mobile penetration past the 100 per cent mark, the additional subscribers to the telco’s network in recent years could be as a result of multiple SIM card holders, who maintain their Safaricom lines.

Airtel Kenya made losses of Sh5.9 billion for the year ended December 31, 2020. [Courtesy]

Airtel Kenya made an average of Sh1,584 from every user last year compared to Safaricom’s Sh4,261 per subscriber over the same period. 

Further, with sales and marketing expenses increasing 52 per cent year-on-year to Sh3.5 billion in 2020, the additional subscribers recorded by Airtel Kenya, often during seasonal promotions, add little to the firm’s bottom line. 

Deloitte & Touche, the auditors for Airtel Kenya, raised concerns in the firm’s financial reports over the ability of the company to maintain operations under the current loss-making streak.

“As of December 31, 2020, the company’s current liabilities exceeded its current assets by Sh4.4 billion,” said Deloitte in its audit report.

“These conditions, indicate the existence of a material uncertainty, which may cast significant doubt on the company’s ability to continue as a going concern,” added the firm.

Airtel Kenya’s board of directors, which until last year included former Kenya Airways chief executive Titus Naikuni who has since resigned, acknowledged the liquidity concern but maintained optimism that new financing would be forthcoming. The telco depends on shareholder loans to run operations.

“The directors acknowledge that the continued existence of the company as a going concern depends on the outcome of various strategic measures that the directors continue to pursue to return the company to profitability and the continued financial support from the company’s shareholders and bankers,” said the board in a statement accompanying the telco’s annual report.

“The directors are confident that any financial support required by the company from its shareholders will be forthcoming and are of the view that the strategic turn-around measures that have been put in place will restore the company’s solvency and will enable it to trade profitably in a sustainable manner.” 

The parent company, India’s Bharti Airtel, has in the recent past been selling off part of its African business in a bid to raise capital for its local subsidiaries. Earlier this year, Airtel Africa sold minority stakes in its Airtel Money business to several investors, including investment firms The Rise Fund and Qatar Holding LLC,  and Mastercard.

Titus Naikuni. [Courtesy]

The transactions will yield Sh55 billion and are part of the firm’s bid to sell up to 25 per cent of its mobile money business, Airtel Mobile Commerce BV, which is valued at Sh293 billion ($2.65 billion).

“Following the announcement on March 18, 2021 of $200 million (Sh22 billion) investment in AMC BV by TPG’s The Rise Fund, and the sale of the Group’s telecommunication towers companies in Madagascar and Malawi on March 23, 2021, the transaction is a continuation of the Group’s pursuit of strategic asset monetisation and investment opportunities,” said Airtel Africa in a statement in April this year.

“As previously announced, Airtel Africa aims to continue to monetise its mobile money business with minority investments up to a total of 25 per cent of the issued share capital of AMC BV, and to explore the potential listing of the mobile money business within four years,” said the telco.

Financial Standard reached out to Airtel Africa for a comment on whether the new investment would translate into direct capital injection to its Kenyan subsidiary. The company had not gotten back to us by the time of going to press.

But in September, Airtel Kenya disputed social media reports that the company planned to exit the Kenyan market.

“Contrary to false online reports, Airtel is not leaving the Kenyan market,” a spokesperson for Airtel Kenya said.

“We remain committed to delivering quality and value for money products and services to all our customers whilst ensuring effective, uninterrupted communication is achieved across the entire country.”

Earlier this month, Airtel Africa announced its subsidiary Airtel Nigeria has initiated the process of buying back 8.27 per cent in minority shareholding at an offer of 55.81 naira (Sh15) per share. Some of the company’s latest transactions have, however, fallen afoul of regional regulators.

In September, Common Market for Eastern and Southern Africa’s (Comesa) Competition Authority fined Airtel Africa and Helios Towers Sh11 million for failing to notify the regulator of an intention to sell its infrastructure subsidiary Malawi Towers to Helios.

Comesa’s Committee Responsible for Initial Determinations (CID) said the two parties signed a share sale and purchase agreement three months before notifying the regulator.

“The CID, therefore, determined to impose a fine of 0.05 per cent of the parties’ combined turnover in the Common Market in the financial year 2020, amounting to $102,101 (Sh11.2 million) for breaching Article 24 (1) of the regulations,” said the regulator.

Airtel Africa declined to comment on whether the company is actively seeking out a strategic investor for the Kenyan operations and the growth strategies the firm is exploring following the collapse of the merger talks with Telkom Kenya.

ICT Cabinet Secretary Joe Mucheru earlier this year published a new policy requiring foreign technology firms based in Kenya to have a minimum of 30 per cent local shareholding by 2024. This means that Airtel Networks Kenya Ltd, which currently holds an indefinite exemption from the government issued in 2013, has three years to comply with the shareholding requirement.

ICT Cabinet Secretary Joe Mucheru. [File, Standard]

The decision will also affect its subsidiary Airtel Money Kenya unless the firm applies to the ICT Cabinet Secretary for an extension of time to comply with the requirement or to obtain an exemption. Things have also not been rosy for Telkom Kenya.

While the firm does not disclose its financial results as the case with Safaricom and the recently listed Airtel Africa, with the level of losses of profits only known to management and shareholders, data by industry regulator CA is telling.

The company had 4.24 million subscribers as of June 2019, shortly after the two companies announced plans to merge. But following a period of inactivity as the firm slowed down in its marketing in preparation for the merger, this nosedived to 3.2 million subscribers by March last year.

Airtel had 17.3 million subscribers as of June this year, up from 12.8 million in June 2019, four months after the two firms announced the merger plans.

This is in comparison to Safaricom that had 41 million users as of June this year compared to 33 million subscribers in June 2019.

Telkom has, however, been on a recovery path and had about four million subscribers as of June this year.

But April’s exit of top managers was a major blow. Kris Senanu and Steve Okeyo, managing directors of the consumer service and digital services delivery units respectively, left the company in a surprise move barely months after launching a new recovery strategy they were expected to lead.

In an interview with Financial Standard earlier this year, Telkom Kenya CEO Mugo Kibati acknowledged that the telco had lost some ground during the merger talks but exuded optimism on the telco’s turnaround.

“During the period when we were engaged in the transaction that did not materialise, we initially lost some ground as Telkom, but we have recovered quite a bit of it in the last five to six months,” explained Mr Kibati.