Orange’s boardroom move that went sour

By JEVANS NYABIAGE and EMMANUEL WERE

Orange Kenya could have orchestrated one of the smartest boardroom games in corporate Kenya by diluting the Kenyan Government’s stake in Telkom Kenya and then selling the telecom company to a Vietnamese firm. 

Three months after the Paris-based Orange increased its stake in Telkom Kenya; it received bids from Viettel, the Vietnamese mobile phone services firm in October 2013.

According to sources privy to the intrigues at Telkom Kenya, Vietnamese state-owned operator Viettel Group is said to have audited the Orange Kenya assets in October 2013 with the view of a takeover. “They were here in October to carry out an audit of Telkom assets. I’m yet to find out the outcome,” said a source who requested anonymity, referring to Viettel’s interest in Orange Kenya.

This audit came just three months after Orange had in July 2013 increased its stake in Telkom Kenya to 70 per cent in a complex debt swap agreement, a move that effectively cut the Treasury’s share to 30 per cent from 49 per cent. The increase in the shareholding by Orange was aided by Government’s failure to inject Sh2.4 billion in the first half of last year.

“In December 2012, the Group entered into an agreement with the Kenyan Government on the following main terms that the shareholder loans of the Kenyan Government and Orange (for respectively Sh7.1 billion (63 million euros) - and Sh147 million, were converted into equity and Orange wrote off the balance of its shareholder loan, that is, 299 million euros,” said the company when it released its full year results last month.

“The agreement included an option for the Kenyan Government to increase its equity interest to 40 per cent in consideration of a cash contribution of 2.4 billion Kenyan shillings (about 22 million euros) during the first half of 2013. Since this cash contribution has not been realized, Orange’s stake in Telkom Kenya is still 70 per cent as of December 31, 2013.”

This appears to have been a well-calculated scheme to first weaken Treasury’s grip on Telkom Kenya and then later sell the struggling mobile operator.  For Orange this would have marked a quick and although painful exit from the Kenyan market, where it has suffered losses since its entry in 2007.  The French owned Orange bought a 51 per cent stake in Telkom Kenya for about Sh27 billion.

Orange’s decision to sell its 70 per cent stake in Telkom Kenya would have been quick because with it controlling the majority stake it would have had an upper hand in pushing through the decision in the boardroom. 

Overseas expansion

In Viettel, Orange had found a telecom willing to take the risk in the emerging markets with the Vietnamese state owned telecom making a profit in five of the six countries it operates in. Viettel, which puts its subscriber base at 63 million and revenues Sh602 billion ($7 billion) in 2012, went for Orange assets after Kenya’s largest mobile operator Safaricom and its arch-rival Airtel bid to buy Essar Group’s telecom operations in Kenya, edging it out.

Headquartered in Hanoi, Vietnam, Viettel currently has operations in six countries including Vietnam, Cambodia, Laos, Haiti, Mozambique and Peru. In addition, the company has expressed an interest in entering North Korea, Cuba, Venezuela, Slovakia, Paraguay and Cameroon.

Other sources say after Viettel missed out on Orange Kenya and yuMobile, the Vietnamese telecom company has gone ahead to set up operations in Burundi. Viettel’s overseas expansion strategy is firmly focused on Africa, and the company owns a number of operators and licences across the continent, including: Movitel of Mozambique, Viettel Cameroon and a 65 per cent stake in Tanzanian mobile start-up Epocha & Golden Ocean Tanzania (trading as EGOTEL). In January this year, Viettel was the only applicant for Burkina Faso’s fourth mobile licence. Besides Kenya, Viettel has also expressed an interest in acquiring licences in countries such as Cote d’Ivoire and Swaziland.

Three other telecom giants —South African MTN, UAE based telecommunications services provider Etisalat and possibly American multinational telecommunications corporation AT&T, are rumoured to be interested in the Orange Kenya assets. MTN is already in the Kenyan market through its MTN Business, and Etisalat is involved locally in The East African Marine System (TEAMS) project.

When contacted, Orange Kenya Chief Executive Officer Mickael Ghossein (pictured) declined to comment on Viettel’s interest and instead his communications team sent us a general statement prepared by Orange headquarters that only hinted that the firm could be up for sale.

Orange disclosed to The Standard on Sunday that it is auditing its Kenyan operation to establish viability and find out if bringing in a partner would end its years of operating in the red.Tom Wright, Orange’s press officer, corporate, said France Telecom is currently carrying out a strategic review with regards to its activities in Kenya and Uganda.

“One option would be to find new partners in these countries to ensure the necessary financial and operating resources are available to maintain investment and support the continued development of operations,” he said. The audit recommendation will determine the fate of Orange. Orange has already hired US financial advisory services firm Lazard to find a buyer for its Ugandan operation, and Kenya could be next.

While Orange Kenya has kept under wraps plans to exit the Kenyan market, the third-largest mobile operator in subscriber numbers, yuMobile, has officially thrown in the towel after years of bleeding billions of shillings in losses. Essar has applied to the Communications Commission of Kenya seeking to sell its infrastructure and customers to rivals Safaricom and Airtel, respectively. CCK approved the deal on Friday but the operators have to meet 13 conditions before the deal is concluded.

Mobile operators Safaricom and Airtel will each have to pay the regulator Sh464 million ($5.4 million) besides meeting other conditions. “We have accepted the application for the acquisition made on the 28th February, but the complete approval depends on how fast they meet the new conditions,” said CCK Director General, Francis Wangusi.

Inefficient monolith

Early in the week, Safaricom had warned that it was contemplating quitting from the deal as the regulator was taking too long to make a decision.  If the deal goes ahead, Safaricom will buy yuMobile’s infrastructure and retain about 130 employees in the technical department, while Airtel acquires the 2.7 million subscribers by taking over yuMobile’s number prefix.

What makes Telkom Kenya at the heart of every Kenyan is that its privatisation has cost taxpayers billions of shillings. The firm currently bleeds red ink despite massive cash injections and sweetheart deals from the Government. According to the Orange’s full year results, revenues for the Kenyan unit dropped to Sh9.79 billion in 2013 from Sh10.12 billion in 2012. It made a loss of Sh9.1 billion.

As a consequence, capital and reserves have gone down from Sh16.6 billion — when the balance sheet of the company was restructured in 2012 — to Sh7.5 billion in December 2013. Orange also expects to make substantial payments to former employees of Telkom Kenya that recently won a court case in which they were seeking Sh3.2 billion in severance pay after they were retrenched from the firm in the years before its sale to Orange.  There are two more cases that are still in the courts where more ex-employees are seeking Sh2.1 billion in damages.

When the Government in December 2007 sold Telkom Kenya to the Frenchmen, the main objective was to stop the perpetual pumping of taxpayers’ money into what had evolved into an inefficient monolith. Telkom Kenya was privatised because it didn’t have the resources to invest in new technology. France Telecom was touted because it had solid capital resources to invest and to turn Telkom Kenya into a company capable of competing with nimbler, modern players.

But, six years down the line, none of the objectives for which Telkom Kenya was sold has been met. It’s now a textbook case of a privatisation gone awry. But as it appears, the company has turned to be of more pain for taxpayers. 

Interestingly, the Government’s stake has been cut to 30 per cent, not through an IPO as it was initially anticipated but its partner France Telecom has slowly diluted the Treasury’s stake in Telkom.