Ideas & Debate

Why Safaricom bid for yuMobile assets faces CAK hurdle

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A Safaricom customer care centre in Nairobi. CAK claims Safaricom failed to meet quality of service targets set by the regulator in the financial year 2012/2013. Photo/FILE

In the first week of March, Safaricom disclosed that it had entered into discussions to buy some of the assets of Essar Telecommunications (which has been trading as yuMobile).

In the proposed transaction, Safaricom was expected to go for no less than yuMobile’s current network infrastructure that includes base stations; and which could, among other things, help it with such key areas as improving voice quality.

However, they were not the only party in the transaction since Airtel was to acquire more than three million subscribers on yuMobile who would enjoy free mobile number portability, meaning they would not change their lines.

READ: Safaricom, Airtel splash Sh8bn for yu

It has now emerged that Safaricom has ran into strong regulatory headwinds to the extent that it is considering withdrawing its offer.

The regulator— the Communication Authority of Kenya (CAK) — has suggested that granting of no-objections for Safaricom’s application will not be automatic. But this is not a surprise.

According to CAK, Safaricom, as a market leader in the mobile telephony business, failed to meet quality of service (QoS) targets set by the regulator in the financial year 2012/2013.

According to CAK, Safaricom was the only operator that did not meet the set targets and scored worst ratings in Eastern, North Rift and North Eastern regions. Compliance was tested on several paremeters. So there has been a constant back-and-forth between the two entities regarding quality of service.

And still staying with the regulator, Safaricom is highly regarded as being a dominant player. For the first quarter period ended September 2013 (of the current 2013/2014 financial year), it controlled 79.1 per cent of total voice traffic.

Additionally, 95 per cent of its voice traffic were on-net, which means Safaricom subscribers called each other the most (a phenomenon referred to as the club effect); its closest rival Airtel, registered only 45 per cent.

The regulator generally does not seem to be happy with this “club effect” and regards Safaricom as making it harder for other operators to access its subscribers.

Secondly, Safaricom seems to have lost the cordial relations with government that it previously enjoyed, especially after the Westgate terrorist attack in September 2013. This stemmed from CAK’s claims that the terrorists used unregistered sim cards to plan and carry out the attack.

This became a public relations nightmare especially for both Safaricom and Airtel (and senior operatives in the Government may not have been specifically happy with Safaricom’s handling of the situation).

READ: CEOs of telcos face arrest over Sim card crimes

This high-level relationship remains a key element of doing business. But most importantly, the regulator does not seem to be happy with certain elements of the industry, which it directly attributes to Safaricom’s dominance.

For instance, Kenya’s telecoms industry is the only one in this region where only one operator is making money (while all the other players register consecutive losses).

It certainly doesn’t show a level-playing field and CAK seems to be out to repair this and would be highly reluctant to approve any action that would further entrench Safaricom’s dominance (however small the action is).

Some of the assets Safaricom is seeking to acquire do not seem to add much; at the close of 2012/2013 financial year, yuMobile had deployed 5,500 2G transceivers (and had no 3G transceivers), which was just 10 per cent of what Safaricom had.

When CAK puts all the above factors into play, it will be reluctant to approve the deal.