[the east african] The French government has mounted a fresh diplomatic offensive to support a massive claim for Ksh25 billion ($325 million at current rates) lodged by France Telecom with Kenya's Treasury, as Paris raises the stakes in a dispute that could unravel what was the largest privatisation deal in Kenya.
The huge claim -- which the Treasury has disputed -- is based on France Telecom's sensational claim that it only found "an empty shell" after it purchased the defunct Telkom Kenya from the government in 2007 for a sum of $390 million.
Paris has moved to place the dispute at the top of the agenda of a high-profile diplomatic meeting this Monday with Prime Minister Raila Odinga, to be attended by top French government and executives of France Telecom.
Until recently, the dispute had been confined to secret negotiations between the Treasury, France Telecom's CEO Michel Barre, investment bankers representing both sides and lawyers, representing the Kenya government.
Technically, France Telecom's is saying that Kenya is in breach of warranty claims made under the share purchase agreement that the parties signed during the sale of Telkom Kenya.
With the new diplomatic offensive, it is clear that France Telecom has opted for a double pronged tactical strategy: One the one hand, engage the Treasury in technical and legal negotiations, and on the other, apply diplomatic muscle to force a political solution to a dispute over what is basically a financial transaction.
Meanwhile, new details are beginning to emerge on the exact nature of the massive claim by France Telecom.According to sources, the French have claimed a huge Ksh10.3 billion ($134 million) on the grounds at the network equipment they inherited when they took over Telkom Kenya was grossly overestimated.
They have reportedly argued that the fixed asset register which they inherited was grossly faulty and several fixed assets were found missing.
That they did not get the opportunity to conduct a proper count of the network equipment and the only 100 per cent count of network equipment that was conducted was concluded several months after they had taken over.
The French have said that at the time they were doing diligence, they did not get an opportunity to conduct a physical inspection of the entire Telkom Kenya network across the country.
France Telecom have also insisted that at the time they were taking over, the government did not disclose to them that it had committed Telkom Kenya to purchase 450,000 units of CDMA telephone handsets and terminal equipment for $40 million from a company by the name Rapid Communication Ltd.
The French have argued that the deal with Rapid Communications was not disclosed even in the data room.Apparently, the share and purchase agreement stipulated that neither Telkom Kenya nor the government was allowed to enter any contract agreement with third parties between the date of signing and closing the deal.
On the basis of the claim by the French that the government breached this rule alone, the French want to be paid a sum of Ksh518 million ($6.72 million).
The company is also claiming a total of Ksh1.5 billion ($19.5 million) from the government on account of unpaid telephone bills by both the central government and parastatals as at June 2007.
Included in the claim by France Telecom is a Ksh1.6 billion ($20.7 million) claim based on over-valuation of Gilgil Telecom Industries Ltd.
A good number of the claims are of an accounting nature. For instance, France Telkom has lodged a claim of Ksh978 million ($12.7 million) on the grounds of over-statement of inventories resulting from obsolete and non-existent assets.
It has claimed another Ksh1.3 billion ($16.9 million) on the grounds of understatement of accounts payable as at December 31, 2007.
Also huge is a claim of Ksh2.5 billion ($32.5 million) consisting of unsupported balances and suspense accounts.
In summary, the total claim by France Telecom comes to a figure of Ksh25 billion which is just about what they paid the government for the 51 per cent stake in Telkom Kenya.
The shares and purchase agreement between the government and France Telekom was made on December 2007.In the deal, the government agreed to sell 51 per cent shares in Telkom Kenya, relying on several presentations, warranties and undertakings.
The massive claim by France is based on the warranties made on the share purchase agreementWhether the government will agree to pay the amounts being claimed by the French remains to be seen, in view of the fact that the figure more or less amounts to what France Telecom paid for the shares.
Well-placed sources told The East African the Treasury was likely to resist paying the French any cash and was more inclined to options such ceding new assets to Orange East Africa, giving new licences or pumping in new money into the company, mainly in the form of new shareholder loans.
Before privatisation of the company, the International Finance Corporation, who were the transaction advisers on the deal, valued Telkom Kenya at $353 million.
The purpose of this valuation was to determine the reserve price. As part of preparations for privatisation, all bidders were allowed access to a data room that contained all data on Telkom's financials, including a due diligence report that had been conducted by audit firm PKF Consortium.
Kenya: Paris in New Diplomatic Offensive Over Telkom