Why there is more than meets the eye in Telkom—Airtel Kenya merger plan

A telcos mast. Will a merger between Telkom Kenya and Airtel benefit consumers? (XN Iraki)

The proposed merger between Telkom Kenya and Airtel Kenya was expected to be an easy deal cheered by the market.

Safaricom put some bumps on the road by demanding debts owed by the separate entities and a level playground for the spectrum, one of the key assets in the telecommunications sector. It’s a clever move, you strike when the iron is hot.

One curious question is how spectrum is assigned to the telcos. Security reasons apart, have we tried auctioning the spectrum? Since spectrum is a national resource like oil, should we not get maximum returns from it?  Auctioning would give the best price.

For those who slept through physics lessons, the spectrum is a range of frequencies mostly electromagnetic from small gamma rays to radio waves. Most of us are used to seven colours of the rainbow, which constitute the visible spectrum. The frequencies or waves carry the information from TV signals to voice or data.  

The strategic significance of the spectrum might explain why the top seat at Communications Authority of Kenya (CA) is so hot. By having more spectrum, the combined Airtel-Telkom would give Safaricom a run for its money because of expected superior services and flexibility therein.

Remember the time TV screens went blank as we shifted from analogue to digital system? We wanted more efficient use of scarce spectrum.

Why is this merger so closely watched? I asked a group of graduate students what they think about the merger. Mbishai Borough supports the merger, “to dilute Safaricom’s dominance, and push prices downwards to the benefit of customers. However, it should be done carefully; the liabilities of both companies should be carefully examined. If done haphazardly, both companies may suffer, and eventually, become insolvent.”

Frank Obongi says, “the merger should and must take place, this is to give Safaricom an equal competitor and check their near-monopolistic market dominance.” Irene Shimanyula supports by suggesting that the telecom industry is turning into oligopoly and could easily end up as a monopoly.

Brian Musyoka supports the merger, “to enhance scale and efficiency leading to enhanced range and quality of products and service offerings and greater choice and convenience for customers.”

Pauline Odipo Gicheru has a different opinion, “unless their competitors offer services tantamount to those of Safaricom, then a merger will result in no benefits.” Hilda Murungi adds her voice suggesting that the merger will encourage healthy competition in the telecommunication industry. She adds that if it fails, Safaricom should be declared dominant player.

Is Safaricom finally vulnerable in the lucrative telco market made more attractive by money transfers and payment solutions? With a market share now asymptotic to 60 per cent, will Safaricom remain a leader with its stream of innovations? No one should write off Safaricom in a mature industry. Have you noted that most people call only when there is a need, the excitement when mobile phones were new is gone?

The Airtel-Telkom merger has another strategic advantage, it will shift focus from Safaricom suspected dominance. It seems what the regulators couldn’t do, the market has done.

Those cheering the merger are not asking how Safaricom will react with its financial muscle and backing from Vodafone. With the Government having a stake in Telkom, shall the new entity ensure there will always be a financial umbilical cord?

It is assumed that the new and bigger rival to Safaricom will increase competition and the consumers will benefit from more efficient and cheaper services.

Never mind that telcos will become a duopoly. It is not clear to me why most Kenyans think Safaricom needs another firm as big to compete effectively. Why not licence more firms?

Apart from the desire to tame Safaricom, what else does Airtel and Telkom Kenya have in common?

As we found out with YU and Orange, a new entry is unlikely to do well in a mature industry. Think of Kuguru foods and soft drinks. A second wife faces the same problem if she marries too late.

Do not ask me how I came to know that. Luckily, innovations like WhatsApp based calls could shake up the industry. Giants like Facebook, have sensed there is money in payment solutions and could shake the industry from outside. Suppose Facebook tried to buy Safaricom?

One curious observation in the merger is that physical assets, data platform and money transfer services are outside the scope of the merger. Is that a hedge in case things don’t work? Is it a safeguard against asset stripping? What sort of synergy are the two entities creating with this merger? Is it just symbolic? Is there more than meets the eye in the proposed merger? Could there be invisible hands behind this merger?

Some observers think the two big telcos could collude and keep the prices up. Could they become so powerful that regulators might sing their tune, get co-opted? Of interest to me is the merger conditions set by the regulators, Competition Authority of Kenya and Communications Authority of Kenya.

Mergers and acquisitions often lead to job losses. The combined entity sheds jobs as economies of scale set in. Job losses could be another bump on Telkom-Airtel merger. Mergers are not unique to Kenya. In the USA, T-mobile merged with Sprint, AT&T with Time Warner and Comcast and Sky among others. What is clear is that regulators always ensure that the customer is not hurt through reduced competition.

So much activity

Mergers and acquisitions are characteristics of industries about to mature or brimming with innovations. Lately, there has been so much activity on mergers and acquisition by foreign firms that one could think Kenya is on sale. 148 merger notifications were received by Competition Authority of Kenya during the 2017/2018 financial year. Banking and insurance sectors are popular.

The vibrancy of the Kenyan market and transition of firms from founders to the next generation could be catalysing the mergers and acquisitions.

This might also indicate we are not getting the real value from the local firms which new owners want to realise. Who is next after Telkom-Airtel?

-The writer is an associate professor at the University of Nairobi School of Business.

Financial Standard
Premium Price cuts: Why State could be taking undue credit
By Brian Ngugi 56 mins ago
Financial Standard
Premium Gikomba gold rush: Banks scramble for a slice of Nairobi's street hustle
Financial Standard
Premium Inside Sh5b NOC-Rubis deal to revamp cash-strapped oil marketer
By XN Iraki 56 mins ago
Financial Standard
Premium Yes, prices are falling but it might be too early to celebrate