Safaricom, Airtel splash Sh8bn for yu

Mobile phone firms Safaricom and Airtel have bought out yuMobile, opening a new chapter in the industry.

People familiar with the deal say the three firms met with the regulator, Communications Commission of Kenya, on Friday to finalise the deal.

yuMobile managing director Madhur Taneja told the Sunday Nation on Saturday said they had entered into an agreement with two companies. The deal is valued at about $100 million (Sh8.6 billion).

Safaricom is to buy the Essar-owned yuMobile’s infrastructure and retain about 130 employees in the technical department. Airtel is to acquire the 2.7 million subscribers by taking over the mobile number prefix, thus allowing the customers to migrate to its network without having to change their identities.

Kenya Refineries

The Indian-based multinational is also exiting from the Kenya Refineries, where it is selling its 50 per cent stake to the government. The deal was concluded last week.

The buyout complicates a court case filed in January by 223 yuMobile employees seeking orders to bar the operator from varying their terms of employment or entering into agreements that could change their positions.

The case is pending in court. The case was filed after it was revealed that yuMobile was looking for buyers.

READ: yu workers seek travel ban against Indian boss

The latest statistics from the CCK show that Safaricom continues to dominate the Kenya market, controlling 66.5 per cent of the subscriber share, followed by Airtel with 17.6 per cent, yuMobile at 8.8 per cent and Orange at 7.1 per cent. 

According to court papers filed in defence to the employees’ suit, Mr Taneja says yuMobile had invested about Sh35 billion in its Kenyan business since the launch in 2009, but had accumulated losses to the tune of Sh25 billion and continues to incur a loss of Sh3 billion annually, making its continued existence financially impossible.

The deal, which has been in the pipeline for some time, is said to have been accelerated by reports last week that four companies are angling to make an entry into the mobile operators world.

Equity Bank, Nakumatt, Mobile Pay and Zioncell have all registered an interest to roll out mobile phone services, albeit on lower different licensing regimes, allowing them to ride on the existing network. yuMobile had indicated that it was in talks with Equity Bank.

“We are in discussion with them as they are partners but I cannot comment on any developments in progress,” Mr Taneja said last week.

The firm’s sale is expected to change the dynamics in the telecommunications industry and put Orange under increased pressure as the top two increase their grip on the market.

Successfully migrated, Airtel will see its market share hit 25 per cent, while Safaricom will benefit from additional infrastructure, which it needs to improve on its quality of service.

News of Essar selling its Kenya unit first broke in June 2011 when India’s Economic Times quoted two unnamed sources saying Essar was looking for a buyer for its telecoms operations in Kenya and that it would be willing to sell the business for about $300 million.

However, the Kenya office denied this claim, saying the Indian parent company was committed to the Kenya operation.

“Our expectations for Kenya have not changed, our outlook on Kenya has not changed and our commitment to Kenya as a market continues,” Mr Taneja said. “We have already invested substantial monies and we will continue doing so.”

Early in the year, in an interview with the DailyNation, Mr Taneja sounded optimistic, saying he was looking to secure Sh8.5 billion to roll out a 3G network – which allows faster Internet connectivity – to position the company in readiness for data business.

yuMobile is the only one of Kenya’s four operators without a 3G platform and instead runs its services on 2G. The CCK has issued yuMobile with a one-year licence to test-run operations on the 3G network before it can roll out the services on a commercial basis.

“yuMobile is committed to expand its network across the country and enhance existing network capacity to meet growing subscriber demand. It has also applied for 3G operating licence in Kenya. To finance this expansion, it is in discussions with strategic investors for further investments in the company,” Mr Taneja said then.

But two events last year exposed the bleeding yuMobile was going through despite the optimism. One of the current buyers, Airtel, hauled it to court for non-payment of about Sh338.6 million in leasing fees from a site-sharing contract for 300 sites.

In December, yuMobile offloaded its 10 per cent stake in the East Africa Marine System, the undersea fibre-optic cable company, to Safaricom for $11 million (about 946 million).

This, plus the harsh reality on the ground, people close to the inside dealings say, informed yuMobile’s decision to sell. 

“In fact, a simple financial modelling clearly indicates that, given the current state, the weaker players in the mobile sector are unlikely to generate a reasonable return on investment capital,” an insider who didn’t want to go on record told the Sunday Nation.   

A statistical analysis shows that over the next five years, mobile money generated by mobile business is projected to grow to about Sh212 billion in cash flow.

However, the weaker players are only expected to generate Sh8.4 billion over the period but have to invest at least Sh18 billion, making it financially unviable to continue operating as a going concern.  

Equally, the fact that Kenya has been unable to exploit information communication technologies and monetising them was also a key factor in informing the exit decision. 

Network Readiness Index released by the World Economic Forum ranks Kenya at position 99 among 142 countries largely on its inability to leverage ICT for overall social good.

In 2005, the government rolled out a policy aimed at making Kenya an ICT hub in the region, spurring the industry to employ at least 30,000 workers annually in the business processing outsourcing. This saw government in partnership with the private sector invest in undersea cable for cheaper high speed Internet connectivity.

However, little has been achieved on this front.

The decision to sell was also made on weighing whether yuMobile business, in its current form, would survive collapse of any of the other two struggling carriers, Airtel and Orange.

The ripple effect, which would see customers lose on unspent airtime and tightening of credit market both by commercial banks, suppliers and other service providers, would most likely force it out of business.

Selling at this point would grant the owners a better bargaining position. And, on Friday afternoon, Mr Taneja led his team in selling off the company to two of his rivals.

This story was first published in the Sunday Nation.