Zimbabwe’s US$350m telecoms sale: TelOne, NetOne to be sold as one, but debts give bad signal

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Finance Minister Mthuli Ncube expects to raise US$350 million from selling majority shares in state-owned telecoms assets, a plan that includes selling fixed line and internet provider TelOne and mobile operator NetOne as a single entity.

Selling stakes in TelOne, NetOne, postal Zimpost and the POSB would ease the burden on government, Ncube said. The sell-off was first announced in October last year, as part of a programme to either partially or fully privatise 35 loss-making parastatals.

“Work is already under way to identify transaction advisers. (The) government projects to realise over $350 million from this initial process,” Ncube said after Cabinet on Tuesday.

Instead of selling NetOne and TelOne as two separate entities, governments plan to offer the companies to investors as a single attraction.

“We are confident that this approach of offering the two companies as a package is the way to go. They are joined at the hip and they are best working together, and I think that will get value for money this way and we will see a more competitive sector that will benefit the user in the long term,” Ncube said.

TelOne had already selected Price Waterhouse Coopers (PwC) as its lead advisor on its own privatisation, prior to government’s decision to have the company sold together with NetOne. Government is ready to engage PwC to advise on the combined sell-off, Ncube said.

How would this bundle work?

Ncube explained that he would not merge the two companies before selling them off. Instead, he wants to create a special purpose vehicle (SPV) that would control both firms.

“We would set up an SPV, which could then take 100% of the equity in the two entities. They (NetOne and TelOne) would be both held by this SPV, and then the shares are sold at SPV level. You don’t have to do anything about merging operations,” Ncube said.

Government would then sell 60% of the SPV to suitors, keeping the remaining 40%. Ncube however said government is willing to negotiate with investors on that 40%.

Wrong number?

Ncube expects to have a preferred bidder in place by September. However, it will not be an easy sale. The companies are saddled with debt, which makes them unattractive to investors.

TelOne made $11.8 million loss in 2018. The company had legacy debts of about $384 million as of December 2018, and Ncube admits that these debts “do not help the balance sheet of the company and something therefore needs to be done to help the company move forward”.

NetOne liabilities exceed its assets by about $48 billion, although it managed to swing from a $58 million loss in 2017 to a $10million profit last year.

NetOne was the first to offer a mobile service in 1996, a two-year head start on Econet. But lack of capital and poor management saw NetOne overtaken by Econet, which now controls over 65% of market share. Ncube says the NetOne and TelOne fell behind because they had no capital from their shareholder, the government.

“These two companies have done all they could to compete in an environment where they had no access to equity capital, because government is constrained in terms of putting equity (capital),” Ncube says.

“This means they had to borrow offshore, but debt is saddling these companies so what they need is equity injection, technology injection in hard USD, hence our desire to partially privatise these companies.”

Playing catch-up, NetOne has received $285 million in Government-guaranteed loans from China for network expansion since 2016.

This month, TelOne commissioned a US$23.6 million fibre backbone network. However, the company owes US$500 000 in interest payments for the first phase of the US$98 million project, funded by the China Eximbank.

TelOne is sitting on letters of demand, worth a total of US$22 million, from foreign suppliers. Telecom Capital Finance, based in Mauritius, has threatened to seize TelOne’s share of the West Indian Ocean Cable Company (WIOCC) over a $1.1 million debt.

Who would buy?

In October last year, Cabinet granted NetOne approval to start negotiations on a joint venture agreement with Telkom of South Africa. There has been no further update on this since. In 2010, another South African firm, MTN, abandoned an attempt to take over 51% of NetOne.

Ncube said he is aware of these previous bids and believes that the two South African firms would get more value from a bundled TelOne and NetOne deal.

“If these entities are still interested – and we will approach them by the way and let them know – then they have a much bigger asset to compete for in the form of the two assets together as opposed to a TelOne or NetOne which was the case before. But there will be other suitors that we will invite,” he said.

Any bidder would need to have the capacity to handle both fixed and mobile telephony, Ncube said, which would suit firms of the likes of Telkom’s scale.

TelOne, despite its legacy debts, can be an attractive prospect for investors. The company has its roots in fixed telephony, but, under CEO Chipo Mtasa, it has been successfully shifting focus towards broadband in recent years as voice revenues plummet worldwide. Internet services accounted for 38% of TelOne revenues in 2017, up from 29% in 2016.

TelOne’s blended average revenue per user (ARPU) – a measure of how much each customer spends on the network – is US$27. However, for broadband alone, ARPU stands at US$409.