Yu tests local owners’ faith with Sh2.1bn demand

Essar Telecom has requested its local shareholders and its parent company, Essar Group, for a Sh10.5 billion capital injection to stave off a liquidity crisis in what will test the faith of Kenyan investors in the company.

The mobile telecoms firm said it needs the funds to meet its operational costs like salaries and marketing and to upgrade its network. Shareholders will be expected to inject the money on a quarterly basis over the next two years.

This means that the local shareholder Startnet — which has a 20 per cent stake and is associated with businessmen Peter Kibiriti and Jos Konzolo— will be expected to pump in Sh2.1 billion over the two years. Its parent company Essar Group owns 80 per cent and is expected to contribute Sh8.4 billion.

Poor participation of locals in financing the huge capital outlays of telecoms firms has been a source of shareholder friction across the industry and it remains to be seen if Essar’s resident investors will participate in the fund raising plan.

“We have asked for $125 million (Sh10.5 billion) from our shareholders and this will be in form of equity contributions by each partner, meaning even the local partners will have to meet and maintain their 20 per cent investment contribution,” Madhur Taneja, the country manager of Essar Kenya—owners of the Yu brand—told the Business Daily in an interview on Monday.

“The funds will go towards both capital and operational expenditure across various functions at yuMobile ranging from network infrastructure improvements and operational expenses.”

The company has been struggling to break even since its entered the Kenyan market as the fourth operator and has been relying on its parent company and loans to run its business.

Its performance has been worsened by the ongoing price war which has seen airtime prices more than halve since August 2010, pushing market leader Safaricom to report a drop in profits as it rivals sank deeper into losses.

Safaricom reported a 4.5 per cent drop in net profits to Sh12.6 billion in the year to March while Telkom Kenya announced losses of Sh18 billion in 2011.

Already, Telkom Kenya has asked its shareholders— the Kenyan government and France Telecom —for a Sh10.5 billion bailout to repay its loans and meet its operational needs. The government has agreed to offer it Sh2.5 billion of the Sh5 billion Telkom Kenya is demanding. Telkom Kenya is 49 per cent owned by the government and 51 per cent by France Telecom.

Essar’s share of Kenya’s mobile phone subscribers has increased from 6.2 per cent in 2010 to 7.9 per cent in December, but it still trails its rivals.

Safaricom remains dominant with 67.7 per cent of Kenya’s mobile phone subscribers while Airtel and Telkom Kenya have 15.7 per cent and 10.4 per cent respectively.

Essar has had a difficult past dealing with its local partners, who it says are incapable of meeting their financial obligations to the firm, leaving the Indians alone to search for money to finance the huge capital outlays that the company requires to remain in business.

Inability to contribute to Essar Kenya’s finances is the reason the local investors initially diluted their presence from 30 per cent to 20 per cent, which is the minimum shareholding required for local investors.

The Information ministry has, however, allowed foreign investors, especially new comers and those looking for expansion capital, to hold more than 80 per cent so long as they return maximum limit threshold within three years.