The State has introduced new ownership rules in the telecoms sector that will push Airtel Kenya to sell a 30 percent stake to Kenyans over the next three years in what is part of a move to encourage local ownership of ICT firms.
Joe Mucheru, the ICT Cabinet Secretary, unveiled a licensing policy on Friday that has given telecoms firms up to March 2024 to ensure local ownership of at least 30 percent in the companies.
He also increased the local ownership threshold from a minimum of 20 percent, a cap that has been in place since 2008.
A few firms, including Airtel Kenya, have been exempted from the shareholding rule, a window that let billionaire investor Naushad Merali to sell a significant portion of his shareholding in the firm worth billions of shillings without contravening the law.
Now, Mr Mucheru through the Friday Kenya Gazette notice has directed firms that had secured waivers on the local ownership rule to comply within three years.
Firms that complied with the earlier shareholder limit of 20 percent must upgrade to 30 percent within two years.
MTN Uganda has previously indicated it would prefer to sell a stake directly to a local pensions fund to meet local ownership demands rather than having to list shares.
“An existing licensee that had a waiver granted under the ICT Sector Policy Guidelines of 2006 will have three years to meet the local equity ownership threshold with effect from the date of this Notice,” he added.
The order look set to trigger deal making in Kenya’s rapidly expanding information and telecoms sector, a potential that has drawn the interest of foreign companies.
Analysts reckon it could also lead to a number of firms seeking listing at the Nairobi Securities Exchange (NSE) for compliance, though most non-compliant firms would prefer to sell a stake directly to billionaires or high-net worth investors like local pensions fund.
In Uganda, telecoms operators must list at least 20 percent of their shares on Uganda Stock Exchange (USE) by October.
Kenyan laws have no requirement for listing on the NSE.
India’s Bharti Airtel fully owns the Kenyan unit, which in March 2013 was granted an exemption to the local shareholding rule without a limited period for compliance.
To attract new investments into the sector, the regulation capping foreign ownership of telecoms companies at 80 percent was in 2009 relaxed to allow foreigners to launch operations without a Kenyan partner and gradually comply by finding local partners in three years.
Locals own more than half of Safaricom while the government has a 40 percent stake in Telkom Kenya with private equity firm Helios Investment Partners owning the remaining 60 percent.
Airtel’s difficulties in finding a buyer for the stake has been linked to the mismatch between the company’s valuation and local investors’ assessment of its worth based on the position that the business remains in the loss-making territory.
This position is what prompted the State to offer Airtel an open-ended waiver on the local ownership rule.
Mr Merali owned a 40 percent stake in the firm in the late 1990s and made a number of share sales in the years to February 2011.
He sold his remaining five percent stake for Sh738 million in a deal that valued shares equivalent to 30 percent ownership at Sh4.5 billion.
Airtel has found it difficult to shake the dominance of rival telco Safaricom despite setting off a fierce price war that has partly contributed to the current low calling rates.
The low price model has helped it to gain market share, but failed to make it profitable. Airtel Kenya’s subscriber market share jumped to 27.2 percent at the end of December, from 14.9 percent in September 2017.
Airtel Kenya posted a combined loss of Sh3 billion in the year to March 2020, raising its cumulative losses to above Sh70 billion. Safaricom returned a profit of Sh74.6 billion in the same period.
The removal of the exemption deadline gave the Indian parent company Bharti Airtel more time to improve the company’s performance and fetch a higher price for the stake.
Mr Mucheru says that Airtel can seek another waiver or extension of time for compliance, but did not reveal conditions for exemptions.
Analysts reckon the telco could push for another waiver or listing through the alternative segment at the NSE.
“I see them pushing for relaxation of the rule. But listing on the alternative segment cannot be ruled out and the State could prefer this option,” said Eric Musau, head of research at Standard Investment Bank.
The Nairobi bourse demands that firms be profitable ahead of listing on the main segment, but has less stringent requirements for alternative segment.
Airtel says there are no rules guiding waiver on the shareholder rule. “The Policy Guidelines do not set out the specific circumstances under which an exemption may be granted,” said Airtel in an earlier note to shareholders.
Mr Merali owned 40 percent of the company when his investment firm, Sameer Group, jointly launched KenCell Communications with its French partner, Vivendi, in 2000.
Three years later, when the French firm decided it was time to leave Kenya, Mr Merali used his pre-emptive rights to play one of the smartest boardroom chess games that pitted a number of global telecoms giants against each other for Vivendi’s stake.
He bought the Vivendi stake in KenCell at $230 million and sold it to a new partner, Celtel International, the very same day for $250 million — earning a profit of $20 million (Sh2.16 billion).
In 2008, he sold half of his 40 percent stake to Zain and further reduced it to five percent with the 15 percent sale in 2009 for $63.75 million (then Sh6.8 billion).