UPDATE: France Telecom Expands into Kenya in EUR270 Million Deal
PARIS -(Dow Jones)- French telecommunications operator France Telecom, Friday said the consortium it controls has been chosen by the Kenyan government to take a 51% stake in the country's incumbent operator, Telkom Kenya, for $390 million, or around EUR270 million.
The investment, which the company expects to complete by the end of the year, shows the French telecom giant acting on its strategy of pursuing fast-growing markets outside of Western Europe and sets it up for a proxy fight for market share with British rival Vodafone Group, which has a 40% stake in Kenya's largest mobile operator, Safaricom.
"It's something that management promised to look at and now they're doing it," said Rob Goyens, an analyst at Dexia, noting that France Telecom's 'rest of the world' division, which includes emerging markets, provides strong revenue growth and margins of over 40%.
France Telecom and other European telecom giants have repeatedly expressed interest in expanding further into high growth markets in Africa and Asia. The French operator already has operations in twelve other African countries, including Senegal and Mali.
France's incumbent operator beat off rival bids for Telkom Kenya from Reliance Communications of India, South Africa's Telkom S.A., and LAP Green Network of Libya.
Telkom Kenya has over 280,000 fixed-line customers and will receive a new mobile phone license, France Telecom said in a statement, adding that the mobile phone penetration rate in Kenya is below 30%.
"That provides further upside to France Telecom," Goyens said. He added, though, that due to the limited financial information available on Telkom Kenya, it was hard to make a judgment on the investment.
Under France Telecom's Orange brand, Telkom Kenya will provide a combination of mobile, fixed-line, and Internet services. The operator can become the leader in the high-speed Internet market through the implementation of undersea cables in 2009, France Telecom said.
To get mobile operations up and running, France Telecom will use Telkom Kenya's existing infrastructure to provide a 2.5G network.
Meanwhile, Telkom Kenya's 60% stake in Safaricom, a joint venture with Vodafone, will be transferred to the Kenyan government as part of the deal. The resulting situation will see competing mobile operators backed by France Telecom and Vodafone fighting for customers in the Kenyan market.
Telkom Kenya's performance in fixed-line services, in which it holds a monopoly, has been criticized by businesses who complain that the company's services are inefficient and costly.
Since 1999, Telkom Kenya's number of connected lines has stagnated, with the company's 17,486 staff consuming 49% of cash flow, Joseph Kinyua, a Kenyan Finance Ministry official said Friday.
"The government is carrying out a comprehensive restructuring of Telkom Kenya which involves financial and operational restructuring of the company and privatization, whose key objective is to attract private sector resources to support the restructuring and ensure sustainability of the restructured Telkom," Kinyua said.
In financing the deal, France Telecom has teamed up with Alcazar Capital Ltd, a Dubai-based emerging-market investment fund established by Kuwaiti logistics company Agility. Alcazar Capital has subscribed to a 15% stake in the consortium, with France Telecom holding the remaining 85%.
Under the agreement between the consortium and the Kenyan government, Telkom Kenya will be floated on the stock market within two to five years. At that point, the consortium will reduce its holding to 40%, a France Telecom spokesman said.
In such a situation, France Telecom would remain the main shareholder, as Alcazar would lower its share in the consortium, the spokesman said.
The consortium structure "is indicative of the fact that France Telecom wants to expand in a cautious way," Goyens said. He has a neutral rating on France Telecom and a EUR23.90 target price.
In June, France Telecom joined forces with private equity group Mid-Europa Partners to take control of Austrian mobile-phone operator One.
At 1155 GMT, France Telecom shares were up EUR0.24, or 0.9% to EUR25.68 against a slightly lower benchmark CAC-40 index.
 -By Jethro Mullen, Dow Jones Newswires; 33 1 4017 1738; jethro.mullen@dowjones.com
(Patrick Mjute in Nairobi and Geraldine Amiel in Paris contributed to this article.)
(END) Dow Jones Newswires
Posted to the site on 16th November 2007