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Goodbye to yu? Intrigues behind sale of third-largest mobile operator

By Jevans Nyabiage and Emmanuel Were | February 25th 2014

By Jevans Nyabiage and Emmanuel Were

Kenya: Essar Group’s sale of a stake in yuMobile to raise Sh8.5 billion for the teleco’s operations is said to have attracted bids from its competitors such as Safaricom and Airtel.

But the puzzle that many analysts in the telecoms industry, the general public, business suppliers and even yuMobile employees are trying to work out is what the eventual buyer of the stake will do with Kenya’s third-largest mobile phone services operator whose failed strategy has left it with Sh25 billion in losses. 

Indian firm Essar has maintained that the sale of its stake in yuMobile will be concluded in March 2014, which is just days away.

How it will play out

Two possible scenarios to this puzzle are being whispered among executives in the local and international telecoms industry. 

The first is that the purchaser of a stake in yuMobile will also inject additional capital, and most importantly assist in a survival and turnaround strategy.

But no buyer would agree to be so heavily involved in the telecom operator if they do not have a controlling stake — not less than 51 per cent — that would allow more say in the operations of the firm.

However, the Sh8.5 billion Essar wants to raise is only equivalent to about a 30 per cent stake in yuMobile, going by its valuation of Sh24.5 billion at the time of the Indian firm’s entry in 2008.

The question is whether the owners of Essar will be willing to let go and have someone else run the show.

The second and most intriguing possibility is the demise of yuMobile.

The whispers are that whoever comes in to pump the Sh8.5 billion will offer to purchase the telco’s entire operations. The buyer will then sell off parts of yuMobile to other mobile phone operators like Safaricom and Bharti Airtel. The parts that will be sold include base stations and frequencies.

Sources privy to the dealings intimate that Bharti Airtel, owned by Indian telecoms mogul Sunil Bharti Mittal, is in talks with Essar to acquire yuMobile Kenya.

It is reported Airtel could pay between Sh6 billion to Sh6.45 billion for an undisclosed stake.

Both Airtel Kenya and yuMobile Kenya have a lot in common, the first, of course, being that their parent companies are Indian.

The Indians believe in the “Minute Factory”, whose philosophy is to get as many subscribers as possible by offering the cheapest calling rates. This is in the hope that the volumes will compensate for smaller margins.

Airtel Kenya and yuMobile also share a common goal: unsettling Safaricom.  Airtel, yuMobile and Orange — the brand owned by France Telkom — have tried to use price wars to eat into Safaricom’s market share. 

The three have also come together to demand Safaricom opens up the M-Pesa platform, but little has come of this. It may, therefore, be time that Airtel and yuMobile enter a marriage of convenience.

Market share

“If Airtel Kenya buys Yu out, then they are buying growth. This would also be an admission that organic growth has proved difficult for Airtel Kenya, which is understandable given the absence of any serious data or value added service (VAS) offering to rival Safaricom,” said Mr Peter Wanyonyi, a telecoms analyst.

According to Communications Authority of Kenya data, as at September 2013, Orange had a market share of 7.1 per cent, yuMobile was at 8.8 per cent, Airtel Kenya at 17.6 per cent, and Safaricom at 66.5 per cent. 

If Airtel Kenya were to buy yuMobile, it would acquire more customers.

However, yuMobile CEO Madhur Taneja said the firm is in talks with potential investors to expand the telco’s operations and is not looking to sell at the moment. He said Essar approached Paris-based Bank BNP Paribas to facilitate the search for a partner to boost Kenyan operations.

“We are evaluating opportunities to raise capital and BNP Paribas has been appointed for this purpose. We are in the final stages of entering into a deal with a strategic partner and expect to finalise this by March 2014,” he said when contacted.

“With the partner coming on board, the capital will go a long way towards boosting yuMobile’s operations in the country.  Priority will be given to widening our footprint and upgrading our network from 2G to 3G, which allows for faster data speeds, increasing capacity in the existing markets, among other things.”

Essar’s entry

In 2008, the Ruia brothers — Shri Shashi and Ravi Ruia — who own Essar Group, paid Sh12 billion for a 49 per cent stake in Econet Wireless, owned by Zimbabwean billionaire Strive Masiyiwa. Econet Wireless had been given a licence to set up a mobile operator in Kenya, but it did not do so until the Indians bought into the firm and rolled out yuMobile.

Essar’s game plan was to use its foray into Kenya’s mobile telephony market as a test run for a possible all-out assault in the region. 

The firm also bought a stake in Kenya’s oil refinery in 2010.

The Indian investors hoped to replicate across African markets the successful telecoms business models it has pushed in the Philippines, Pakistan, Indonesia and India on a platform of aggressive network rollouts and competitive pricing.

Essar also acquired a 51 per cent stake in United Arab Emirates-based Dhabi Group’s Warid Telecom operations in Uganda and Congo in 2009, but quit the deal a year later, citing regulatory challenges.

The group agreed to sell its 33 per cent stake in India in Vodafone Essar to UK-based Vodafone, leaving it with only the loss-making Kenyan unit in the telecoms business. 

Ironically, Bharti Airtel bought Warid’s Uganda and Congo operations in 2013.

In the beginning, everything looked rosy for yuMobile in Kenya; it planned to attack the low-end consumer market with low costs, leaving the other telcos to fight it out for other segments of the consumer market.

Need for cash

But its parade was rained on in 2010 when Bharti Airtel acquired 15 Zain operations in Africa for $10.7 billion (Sh921.8 billion at current exchange rates).

Airtel Kenya went ahead and sparked a price war in the telecoms industry in August of 2010 when it slashed calling rates by more than half to Sh3 per minute across all networks.

Bharti Airtel came into the Kenyan market prepared, providing a Sh25 billion war chest for Airtel Kenya’s network expansion. Airtel expanded its network to the point where it leased some sites to yuMobile.

But the two operators have had a rocky relationship.

Last year, Bharti Airtel dragged yuMobile to court for non-payment of $3.93 million (Sh338.6 million) in leasing fees from a site-sharing contract. Airtel had leased some 300 sites to Essar for the installation of equipment and expected to be paid $835,000 (Sh71.9 million) in monthly rental charges.

YuMobile has not had the luxury of raising money from its other shareholders.

Essar Group was forced to buy out minority shareholders — journalist Peter Kibiriti and city stockbroker and former NSSF managing trustee Jos Konzolo — when they failed to participate in cash calls, which heavily hit the company’s operations.

Essar has been in need of cash, so much so that in December last year, it sold its 10 per cent shareholding in the undersea fibre-optic cable company The East Africa Marine System (TEAMS) to rival operator Safaricom for just over $11 million (Sh947.6 million). This raised questions on its plans for the data segment.

YuMobile has also not done itself any favours with its constant change of management. Since 2008, the firm has had four CEOs. Its first boss, Mr Michael Foley, exited just six months after he took office. His deputy, Mr Srinivasa Iyengar, took over but did not last more than a year before Mr Atul Chaturvedi was brought in from India. Taneja is the fourth boss.

Perhaps then yuMobile falling into the arms of Bharti Airtel would not only bring for it much-needed cash but also offer it some stability in shareholding. 

However, both parties are yet to file an application with the Competition Authority. Competition Authority Director General Wang’ombe Kariuki told Business Beat that yuMobile is yet to file any deeds on proposed acquisitions.

Besides Airtel Kenya, there might be other interested bidders, including MTN and Viettel Group.

“Both MTN and the Vietnamese-based Viettel Group have had great interest in providing mobile services in Kenya,” said Mr Danson Njue, an analyst with Informa Telecoms & Media.

One of the biggest worries, though, for anyone thinking of coming into the market is Safaricom’s dominance.

“The hold Safaricom has on the Value Added Service, or VAS, market is virtually absolute with M-Pesa. None of the other operators has been able to even make a name for itself quality-wise, as CCK’s quarterly Quality of Service (QoS) report shows,” said Mr Wanyonyi.

Intriguing possibilities

Because of Safaricom’s tight grip on the market, a second interesting possibility emerges in the sale of yuMobile’s stake.

“Whoever is interested in buying yuMobile might not be buying to build customers but to sell the company to Safaricom,” said Mr Eric Musau, an analyst at Standard Investment Bank.

“Safaricom could be interested in the deal because it cannot get all the customers it has to fit in its own frequencies.”

Safaricom is hungry for more frequencies to properly serve its 20 million customers.

At the moment, Kenya’s largest mobile phone operator suffers from quality issues, with dropped calls and intermittent network access in some parts of the country.

In fact, Safaricom trails its competitors in terms of the quality of its network, as measured by the communications authority. Getting yuMobile’s frequencies would, therefore, be a big boost.

But knowing that if it were to directly express an interest in yuMobile the price could shoot through the roof, Safaricom might just sit and wait for a successful buyer to come in and start selling off yuMobile’s parts.

Safaricom has already bought yuMobile’s stake in TEAMS.

So who could step in to buy yuMobile and break it up into pieces? Well, we would have to consider the possible bidders vis-à-vis two factors in the local and global deal-making scene.

First, there is easy money flowing around the world because central banks in developed markets have kept their taps open to ensure the world recovers from the 2007 global financial crisis. 

But there are fears that soon, perhaps even as soon as next year, interest rates will start to rise. The Bank of England foresees an interest rate rise in 2015. In the US, the Federal Reserve has indicated that it will soon stop pumping money into the global system by stopping its bond-buying programme.

What does this all mean? Money is still cheap globally, which makes this the perfect time to raise cash or seal a merger or acquisition. Therefore, whichever company is interested in buying yuMobile and flipping it for a quick profit currently has access to cheap money.

This partly explains why there has been a wave of mergers and acquisitions globally and in the local market. Locally, there have been the big profile deals at Access Kenya, CMC Motors and Rea Vipingo.

Most deals are being done hurriedly because many companies and investment bankers know that the good times will not last forever.

As the Financial Times of the UK put it in an editorial over the weekend: “The looming change in monetary conditions may help to explain why so many private companies and start-ups are keen to tap the capital markets or to throw themselves into the arms of larger buyers. Investors, however, should beware: what central bankers giveth, central bankers taketh away. Amid market revelry, it is hard to distinguish the inebriated from the sober. But one day, the punch bowl will be taken away. Then the hangover will begin.”

The second factor has to do with yuMobile’s strategy.

As the fourth mobile phone operator to enter the Kenyan market in 2008, yuMobile decided to focus on the youth as its key market. It was a strategy doomed to fail. As Facebook has come to realise, the youth market is fickle.

Trouble with youth

There has been some level of discretionary spending — Kenya’s youth market spending was estimated at Sh252 billion annually by Consumer Insight. But the youth are always after the latest sensation in town. This is why Facebook has been so keen on following the youth and their money by buying popular apps like photo-sharing platform Instagram and messaging service WhatsApp.  

On its part, yuMobile has failed to keep up with the youth. It introduced the cheapest call rates and text messages, but this has not been enough to maintain or draw in the segment — and the telco cannot play catch up with Safaricom’s M-Pesa.

It also lacks the infrastructure to compete with Orange in terms of offering the best in the data market. Mobile operators can tap into the data market to compensate for declining fortunes in the voice segment.

“There is very high demand for mobile broadband services in Kenya. The mobile broadband penetration rates are still very low when compared to the total mobile penetration in the country. So any new investor would want to invest in yuMobile’s data network by deploying a 3G/3G+ network and also increase smartphone adoption to boost data usage. This is in addition to expanding other service offerings such as mobile financial services,” said Mr Njue.

Whoever buys yuMobile will therefore be faced with a conundrum: keep yuMobile alive and continue bleeding losses or sell off its parts to make a quick buck?

The reality of the losses came to light in court documents publicised last week.

The firm’s boss Taneja told the courts that the company has invested about Sh35 billion in its Kenyan business, but has accumulated losses of more than Sh25 billion and continues to incur losses of Sh3 billion annually. This is what has forced it to look for a capital injection.

Taneja was responding to allegations from more than 200 employees who have sued the company over their jobs when the firm is sold. The employees want to be assured that they will keep their jobs even when the firm’s ownership changes hands.

The accumulated losses of Sh25 billion are Sh1 billion shy of what France Telkom paid in 2007 to acquire a 51 per cent stake in Telkom Kenya, or more than double what the Ruia brothers paid (Sh12 billion) for Econet Wireless.

What Sh25b can do

The Sh25 billion would be enough to buy all three listed companies — Access Kenya, CMC Motors and Rea Vipingo — that have attracted bidders.

Maybe Essar would have been better off saving this money and investing it in the oil sector in Kenya. It got into the refinery but has faced so many challenges that it wants to exit.

It could have saved itself the losses and bought listed KenolKobil, an oil marketer that has attracted a lot of interest from larger oil firms, including the Swiss Puma Energy.

Given Essar’s financial performance, it would not be a surprise if they decided to throw in the towel and divest from this market. The challenge in Kenya and the rest of Africa is the high cost of operations, particularly when calculated per subscriber.

If Essar ends up selling, it will be seen as the beginning of the era of consolidation in the telecoms markets as declining tariffs put pressure on revenues.

Essar, perhaps, could have realised that the market is not large enough for two Airtels.

“Ultimately, Yu’s demise is a failure of innovation — they failed to find a killer product to entice customers away from the main operators. As I mentioned a couple years ago, Kenya is essentially a two-operator market. It will remain that way for some time to come,” Wanyonyi said.

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