Uganda Telecom battles for survival

Utl headquarters in Kampala. Utl’s current financial status is far less attractive since it is not investing enough and has a large exposure to liabilities. PHOTO BY MICHAEL KAKUMIRIZI

What you need to know:

  • A report submitted to Parliament recently reveals that Utl is choking on debt with Shs22.244b owed to UCC in unpaid spectrum fees.
  • Mark Keith Muhumuza finds out whether the company can survive after losing market share in the mobile phone segment.

A little over a month ago, the Daily Monitor understands that there were plans to sell a 69 per cent stake in Uganda Telecom (Utl) to investors from the United States of America. The stake held by the Libyan government through a telecom investment firm LPTIC. In fact, several sources had told Daily Monitor that Utl was one of the companies to watch in terms of shareholder developments that were bound to change.
The plan, according to several sources, was to force the Libyan Post, Telecommunication and Information Technology Holding Company (LPTIC) out of Utl and allow a fresh investor to come on board.

It all stems from a failure by the Uganda government that owns a 31 per cent stake in Utl and LPTIC to agree on a recapitalisation plan for the indebted telecom company. Last year, Utl’s licence was close to being suspended after the regulator, Uganda Communications Commission (UCC), noted that the liabilities of the company had exceeded their assets. They were also indebted to a tune of about Shs128b and also had unpaid arrears of more than Shs60b to UCC and other vendors in interconnection fees. At the time, the Uganda Government and Libyan Government went into crisis talks on how to save the telecom company from collapse. During the negotiations, it was agreed that at least $150m be raised as capital to inject into the company.

One year later, the talks are still ongoing and now the company faces a select committee of Parliament which will start an investigation into what is considered to be mismanagement.
On Friday last week, Utl chairman, Mr Stephen Kaboyo held crisis talks over Utl’s future with the Prime Minister, Mr Ruhakana Rugunda. It is understood that the government is determined not to let Utl fail but it does not have the funding option to participate in actual contribution of cash to recapitalize the telecom. The crisis meeting was held after a report by Mr Nandala Mafabi, the Budadiri West MP appeared to open a can of worms alleging that Utl was failing because it was being mismanaged.

In his report, Mr Mafabi notes that Utl is choking on debt with Shs22.244b owed to UCC in unpaid spectrum fees. Several vendors like who provide interconnect fees are owed in excess of Shs8 billion. There are also unpaid tax arrears of about Shs59b owed to URA and unremitted NSSF contributions of Shs16b. The report blames “Poor and unstable management” for the troubles Utl has had and also reveals that there have been management changes at a much higher rate indicating that there is a crisis.

“After the Libyan crisis (2011), Utl has had frequent changes in top management: six managing directors (MDs) to date (an MD per year); eight chief technical officers (CTOs) or one CTO in nine (9) months,” the report reads.
Utl has since denied these allegations.
“In summary, there are a significant number of inaccuracies in what has been recently published,” Mr Stephen Kaboyo, the Utl Board Chairman told reporters. Utl insists it has resolved the interconnection debt obligations and has been remitting NSSF payments since the start of 2016.

A man makes a call at a Utl kiosk in Kampala. PHOTO BY STEPHEN WANDERA

Marriage doomed to fail
Utl’s troubles are historical considering it was one of the government parastatals that held significant assets but was underperforming. In the 1990’s, the Uganda government embarked on the privatisation process that led to the separation of Uganda Posts and Telecommunications into two separate ventures. Posta Uganda took on the Uganda Posts and the Telecommunications arm led to the birth of Mango, a telecom company. Notably, Posta Uganda was never privatised but the telecom segment was, with a German firm UCOM taking over a stake of 51 per cent for $35m (Shs127b). In 2006, that stake was acquired by the Libyan Government under LAP Green Investments.
At the time, Mango was the second largest telecom company in Uganda. LAP Green is reported to have edged out Telekom of South Africa. However, Wikileaks files indicate that the deal which brought LAP Green was part of the strategies for improving relations between Uganda and Libya.

“This is the third major investment by the Libyan government in Uganda in the last year. LAP purchased a 60 per cent stake of the textile firm Tri-Star and was awarded the tender to build the Uganda-Kenya oil pipeline. In 2005, LAP also purchased a majority of shares in the National Housing and Construction Company, a former parastatal,” a 2007 Wikileaks cable reads.
This, relationship in relation to Uganda Telecom and all the other assets have been all but troubled.
“For the past eight years, Utl has faced numerous challenges. During this time, the shareholders and Board of Directors have worked hard to sustain the business,” Mr Kaboyo said.

Utl had inherited numerous liabilities with some of the assets already encumbered by large debt exposure. During this period, the Libyan government continued extending millions of dollars in Shareholder loans to provide capital for the telecom. The total investment to 2015 was about $300m (Sh1 trillion). Utl losses kept escalating, depriving the telecom of the much-needed retained earnings to re-invest.
In 2008, the Uganda government also quietly sold another 18 per cent stake to the Libyans, increasing their stake to 69 per cent. This deal was a debt swap and dealt a blow to any plans by the Uganda government to list 49 per cent of the company on the Uganda Securities Exchange. Utl’s current financial status is even far less attractive since it is not investing enough and has a large exposure to liabilities.

Left behind
Utl was the number two telecom in the country by customer base at the time of the takeover. Today, Utl is a distant third and losing market share in the mobile telephony segment. MTN is the current market leader with over 10.4 million customers. Airtel is in second place controlling about one-third of total subscribers. Utl is a distant third with less than 2 million subscribers. This means that since 2007, Utl has grown from about 652,000 to 1.8 million subscribers in January 2016. This means that for the last eight years, Utl has grown it subscriber base by just 176 per cent.

Since MTN Uganda made a market entry in 1998, it has had a cumulative investment of about Shs2 trillion in the market. Airtel has had several changes in ownership starting from when it was Celtel. In 2005, Celtel was sold to Zain. Five years later, Bharti Airtel acquired Zain. At the time, Airtel was now the number three telecom company in Uganda, until a deal in 2013. In 2013, Airtel acquired Warid – then the number two telecom by assets – and that deal made Airtel the second largest telecom in Uganda. Through all these acquisitions, the former Celtel has now had significant investments that have helped prop up its market-share. During the same period, Utl’s shareholders have not invested as much.
“The telecom sector is investment driven. Technology changes almost every year and you cannot afford to be left behind. Unfortunately for us, the lack of capital has taken away this opportunity for us to invest in the business,” Mr Kaboyo admitted to reporters.

Since 2008, Utl has been dependent on capital from its majority shareholders, with Uganda government not investing capital in Utl. In 2011, the Libyan crisis meant the taps were running dry. For almost three years, there was no investment from Libya, leaving Utl hanging on a thread. It accumulated debts from telecoms and mortgaged properties to secure funding.
By the time the Libyan government stabilised, the financial status of Utl was worrying. The first move has been to restructure the business and reduce costs.

Can utl survive?

According to Mr Mark Shoebrigdge, the managing director Utl, the first step will be to free-up the already agreed Shs128b capital for just improving the infrastructure, upgrading the network and further investment in data services.
“There is currently $34.6m (Shs128b) available as funding for capital investments but the shareholders are yet to agree on how it will be disbursed. This will be just for capital investments, which we have to address now, and then the shareholders including government have to agree on how to deal with the debt issues,” he says.
Capital injection is one of the plans, and meetings held in Malta and Dubai have initiated discussions with bankers and potential buyers into the business.

However, the government appears determined to do away with the Libyan investors. If this does not happen, the government may have to swallow the humble pie and accept another write-down on its shares in Utl or guarantee some of the loans Utl may take on as capital.
In Ivory Coast, LPTIC secured the fourth licence in September 2016 after agreeing to settle taxes and fee arrears of about $15m (Shs54.6b). In LPTIC’s strategy, the investments in subsidiaries must be able to generate returns.
For Utl, this has not happened in eight years. That explains why negotiations with the Uganda government are taking longer.

Options for UTL

Recapitalising Utl

The first option is for the two shareholders to finally reach an agreement on the recapitalisation of the telecom company. To recapitalise, the estimate is that about Shs200b is required to deal with the debt and then capital investments to upgrade the network. This will not be enough to keep Utl out of the woods. They will need to also agree on how much investment will be required annually at least until the company has built any retained earnings in its books. For instance, Airtel shareholders have continued to invest in the telecom even when losses were being made. This was money from shareholders and not the company. The source of the money would also be an important consideration for Utl on whether recapitalisation money will come from financial institutions.

Bringing in new investor
The second option for Utl is for a new investor to be brought on board. That would mean the LPTIC stake would have to be sold or even the government would have to sell its shares. A new investor would have to be one with deep pockets and most importantly one with experience of running and operating a telecom company. Experience is required to turnaround performance of the telecom. It would also include better bleeding of the assets to generate better returns.
The third option would be to let the telecom fail, place it under receivership and sell the assets to raise money to clear liabilities of the company. Once these are sold, then money can be raised to clear company debts and another telecom takes over the assets.

Airtel finally makes a profit

Airtel finally made a profit in Uganda at the end of December 2015. Airtel’s revenues hit the Shs1 trillion mark, several billions short of what MTN Uganda made during the same year. Airtel had been making losses over the years especially after the 2013 acquisition of Warid Telecom Uganda.
However, for the first time in many years, the revenues and income of Airtel were less than the expenses. Airtel made a net profit of Shs86b in 2015, recovering from a loss of Shs131b in 2014. This was, in part, due to reduced expenses that meant operating profit was more than Shs600b in 2015, up from Shs85b in 2014.
The company still has to deal with accumulated losses of Shs492b in 2015, down from Shs543b in 2014. The company still has shareholder debt it is carrying on its books. But for now, it seems it could be out of the woods.