CAK rules out automatic clearance of yuMobile sale to rivals Safaricom and Airtel
The Communication Authority of Kenya says it is assessing the full impact of the yuMobile buyout by Safaricom and Airtel for staff, consumers, competition and in the liquidation of State frequencies. BD Graphic/FILE
What you need to know:
The authority says the process will depend on the welfare of employees, dilution of the frequency spectrum and competition matters such as market dominance.
Although there have been several acquisitions in the telecom sector, this is the first where two leading operators are buying their rival, a matter CAK says may compromise competition.
Industry analyst Nikhil Hira says the current acquisition happening in Kenya will most likely replicated in other parts of Africa.
The approval of the sale of yuMobile to Safaricom and Airtel could take a while as the Communication Authority of Kenya assesses the full impact of the transaction, including liquidation of the frequencies that are a property of the State.
The authority says the process will depend on the welfare of employees, dilution of the frequency spectrum and competition matters such as market dominance.
The buyout, the first of its kind in the Kenyan market, must also get approval from the Competition Authority of Kenya. However the law is silent on what happens if one of the regulators gives a nod and the other disapproves it.
CAK director general Francis Wangusi in an interview with the Business Daily said the authority is yet to make its decision on the buyout that will see Safaricom acquire yuMobile infrastructure and Airtel acquire the 2.7 million subscribers in a deal estimated to be worth be Sh8.6 billion. Analysts have put the value of the firm at slightly above Sh50 billion.
Mr Wangusi said the commission does not want to rush the process.
“The approval is not going to be as easy or automatic as some people may think. We are going to look at various issues such as the impact of this intended buyout to the competition in the sector, the fate of the employees and the subscribers, and also how the business is going to be liquidated and here the focus will be on the frequency spectrum,” Mr Wangusi said.
Breaking even
Kenya has four mobile operators Safaricom, Airtel, yuMobile and Orange. Other than Safaricom, all the others have not broken even.
The unprofitability is the main reason why yuMobile is exiting the market, with Orange also indicating a similar intention.
Although there have been several acquisitions in the telecom sector, this is the first where two leading operators are buying their rival, a matter CAK says may compromise competition.
“The reason the commission and the government licensed multiple players in the sector was to increase competition. However, this buyout now presents a challenge of maintaining the kind of competition we have had in the sector because if it goes through it will reduce the number of the players in the market,” he added.
CAK could be reading from a ruling made by the US regulator when it moved to block an acquisition by AT&T, which has set precedence on such acquisitions.
In 2011 officials at the Federal Communications Commission and the Justice Department moved to block AT&T’s proposed $39 billion acquisition of T-Mobile. That kept the struggling, fourth-place carrier alive as an independent firm, reported the New York Times.
“Regulators feared that shrinking the four major carriers to three would give providers an incentive to raise prices. Instead, regulators saw an elegant escape hatch for T-Mobile. Given the right leadership, regulators hoped the fourth-place carrier could play a spoiler’s role in the marketplace. By aggressively courting new users, T-Mobile would act as an agitator prompting change across the industry,” read part of the New York Times report.
The entry of yuMobile saw the tariffs come down by almost 50 per cent, a move that CAK says was positive for consumers. yuMobile has also been offering some of its services for free a strategy that has made it closer to the youths, especially those in colleges.
Currently, Safaricom dominates voice, mobile data and mobile money transfer services with 66.5 per cent share in the voice market. Airtel has 17.6 per cent market share, yuMobile has 8.8 per cent while Orange has 7.1 per cent share.
The buyout deals will change the market structure if Airtel acquires yuMobile subscribers, a move that could see it control 26.4 per cent market share.
Industry analyst Nikhil Hira says the current acquisition happening in Kenya will most likely replicated in other parts of Africa.
“We are convinced that there will be consolidation in the telecommunications sector and inevitably more inbound investment as the market opens up and the economic returns improve,” Mr Hira said.
“Inter-country consolidation typically raises higher benefits than cross border from integration across all internal functions , re-use or disposal of duplicated infrastructure or high buyer power at local level,” he added.
Already the acquisition has attracted opposition from yuMobile employees who have not only moved to court but have also written to CAK and the Competition Authority asking them not to approve the sale until the court determines their case.
“Kindly note that the petitioners have a case pending in court seeking to stop consummation and implementation of the said transactions prior to settlement of the employees’ dues and a reasonable retrenchment package.
“The parties attempted to negotiate the retrenchment package but the negotiations collapsed after the company declined to offer a better severance pay than half month for each year worked, which is contrary to the employees’ legitimate expectations and to industry standards,” read part of a letter to the Competition Authority from Muma and Kanjama Advocates, who are acting on behalf of the employees.
yuMobile employees have rejected a proposal by their management for a direct transfer to either Safaricom or Airtel when the buyout deal is concluded and instead are asking to be paid their benefits first.
Transition teams
The more than 200 employees said they are demanding a total of Sh1.2 billion, which includes severance pay and annual bonus.
In a proposal by yuMobile, the management has proposed to create transition streams that will handle the transfer the business assets and employees staffing concerns.
“The employees have stated categorically that they want a separation with Essar Telecom Kenya and be paid their benefits. They don’t want a situation where they are directly transferred to these suitors and any engagement with the new buyers should be after the settlement of the dues,” Stephen Kaapei, the chairman of the staff committee, said.
The filing of regulatory approval by yuMobile has intensified anxiety that has gripped the employees for more than 14 months since the talks about Essar’s exit in the Kenyan market begun.
Essar management, in a communication to its employees, said it is ready to adhere to the Employment Act when time comes to render the employees redundant.
In the package yuMobile has proposed that all employees to be paid a minimum of two months notice pay and a severance pay at a rate of fifteen day’s pay for every year of service completed; and a bonus of two months’ pay to those who will not be offered a position by the would-be investors.
June approval
The buyout of the third mobile operator may be concluded before June if it gets an approval from the two regulators and yuMobile has assured its subscribers that services will not be affected by the sale.
“We would like to re-assure our customers that they will continue to enjoy the same benefits, products and services and remain un-impacted in this process,” said yuMobile in a statement.
The firm has been struggling to break even since it entered the Kenyan market in 2008 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.
yuMobile has also sold its 10 per cent stake in the undersea fibre optic The East Africa Marine System to Safaricom as part of fundraising efforts.
According to the latest quarterly report by the Communication Commission of Kenya, yuMobile is the only mobile firm that did not increase it number of subscribers in three months to September, having lost 9.3 per cent of its subscribers to reach 2.7 million customers. Its market share dropped to 8.8 per cent from the previous 10.9 per cent.
During the period, Airtel gained the most number of subscribers, 5.5 per cent to reach 5.5 million customers from the previous 5.2 million (17.6 per cent market share by subscriber base).
Safaricom gained 3.3 per cent new customers to reach 20.8 million subscribers up from 20.1 million in the previous quarter under the review (66.5 per cent) while Orange now has 2.2 million subscribers having increased its market share by 3.6 per cent (10.9 per cent).
