Ratio Magazine :: The Inside Track to East Africa’s Economies - News Analysis: Cash Back for France Telecom or Checking Out?

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News Analysis: Cash Back for France Telecom or Checking Out?

Tuesday, 13 April 2010

According to a feature in the East African, France Telecom are, contrary to earlier reports, not just asking to a reimbursement of effectively their entire purchase price, USD385m for 51% of Telkom Kenya, but are also expecting government to pony up another USD300m – otherwise, the article alleges, France Telecom have threatened to pull out of Kenya.

The Kenyan government will probably scoff at such demands: Reimbursing the entire purchase price would mean giving 51% of Telkom Kenya away for free, even if France Telecom had spent extravagantly to acquire their stake in Telkom Kenya: Their bid was around USD100m higher than the nearest competitor. Possibly an indication that they had gone wrong in their initial assessment of either the market or the company they acquired? Were they deceived, as the article alleges? Or were they not thorough enough in their due diligence, in a country that regularly scores disappointingly on any of the major governance indices? Aside from the claim that assets have disappeared, the company may have underestimated the legacy issues in taking over a former parastatal. Telkom, a company that had to reduce its staff levels from over 17,000 to less than 3,000, could have hardly been a hotbed of managerial excellence and focus on costs and performance.

Expensive Decisions
It is clear that the company hasn’t had an easy time – the KES10bn loss in 2009 attests to that. Kenya’s economic growth in the past two years has been sluggish, but this equally affected the other operators. Telkom needed to invest a lot in infrastructure, and partly, this was self-inflicted when the French investors decided to nudge clients away from their popular CDMA product – a technical platform that effectively makes the home phone portable, and that offers faster bandwidth for data services. This led to a rift with the Kenyan management, and forced the company to invest extensively in GSM infrastructure rather than build on the existing CDMA infrastructure.

Like the fourth mobile entrant, Essar, with its Yu brand, Orange had tried to engage Safaricom in a price war with, so far, limited traction. Obviously such a strategy comes at a cost: Both companies haven’t been able to push up subscriber numbers as quickly as they had intended to, so their low-cost offers mean that they are losing money, not the least because many people now carry around several connections and will probably use the low-cost offers of the new competitors while still maintaining their other line(s). Both companies also had senior management changes, creating additional instability.

Perspectives
Is pulling out of Kenya a serious threat or just posturing? Since France Telecom has already handed over the USD385m, the Kenyan government can lean back for now: If anything, there would be a long court case ahead to sort this out – a scenario that both parties will want to avoid, not just because of the costs, but also because of any potentially embarrassing details emerging. France Telecom had wider regional ambitions, having acquired a license in Uganda, and an escalation of the conflict between France Telecom and the Kenyan government would not improve international investor’s confidence in the Kenyan government with a view to planned additional privatisations.

A failure of this transaction would have fewer market implications than, say, the ailing Kenya-Uganda railway concession that had been a transport bottleneck. But even if a bottleneck is not the main concern, Kenya’s market hardly needs another limping operator, as this will not break Safaricom’s atypical dominance of the market.

After snoozing on the job in Kenya for quite some time, Zain has picked up temporarily under new MD Rene Meza, but by then, the damage was done, and along with the other two new entrants, Zain also flirted with some costly low-tariff promotions. Rene Meza, however, has gone quiet again recently, and when Zain reincarnates, for the umpteenth time, as Bharti Airtel, producers of paints and branding merchandise will be celebrating, but subscribers especially in Kenya and Nigeria may simply lose patience with the interminable rebranding, take the free t-shirt, and run. If Bharti bring along a mass-market, low-rate model: Join the club. And it is a crowded club, since this is exactly what Orange and Yu have tried already, and with which they have not made much money. Zain Kenya derives a large part of its revenues from high-end and corporate clients, so if Bharti transfer their Indian business model, these are likely to drop off, too.

None of this is Safaricom’s fault, and they have aggressively pushed ahead with investments in data, services for corporate clients and other product lines. So the question is: How does this skewed market become less skewed for the benefit of consumers without punishing a company for its undoubted performance?

Update: Press release from France Telecom reaffirming its commitment to Kenya

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