Acquisitions and exits alter the sector’s landscape

The main group of telecommunications providers in Kenya is certain to see a change in 2014, as one of the four major network operators, Indian Essar Telecom’s yuMobile brand, announced plans to exit the market, opening up potential avenues for foreign investment, and another was rumoured to be considering an out. Finding buyers for assets on sale has been trickier given government concerns about preserving a degree of competition in the market. An initial sale plan was finalised in early September 2014 and the deal was awaiting final government approval at that time. The $120m transaction will see Bharti Airtel acquire Essar’s 2.7m subscribers and Safaricom take its physical assets, including the network, office infrastructure and other technologies in use.

Selling Out 

Essar had a total of 2.7m subscribers at the end of 2013, down from 3.2m at the end of 2012, according to data from the Communications Authority of Kenya (CA), the sector regulator.

For Essar Group, profitability had been the main problem in Kenya. Since entering the market in 2009, Essar had invested about KSh40bn ($456m) in yuMobile as of April 2013, according to the company, but local media reported that it has suffered annual losses in recent years. While Essar previously owned a number of telecoms operators elsewhere, it has since sold them off and yuMobile is its only remaining asset in the telecommunications sector.

Essar’s exit strategy involved selling its holding to two of the remaining operators, Safaricom and Bharti Airtel, and negotiations since then have revolved around a deal with those companies. The arrangement, which was valued at KSh8.6bn ($98m) in March 2014, was approved by regulators on March 28, two days after Safaricom had threatened to pull out, citing a lack of guidance from the regulator as to whether it was likely to approve or reject the deal.

When approval did come, however, Safaricom objected to the conditions imposed by the CA. The chief obstacle was a requirement for Safaricom to open both its passive and active infrastructure for use by competitors, including M-Pesa. “The requirement to have Safaricom open up its M-Pesa agent network has raised a lot of concerns,” Safaricom’s CEO, Bob Collymore, said in reaction. “We are therefore no longer interested in the deal.”

However, as summer progressed the deal seemed increasingly probable, and Collymore told media in early August that it would be likely, and that the earlier objections from the telecommunications regulator had since been withdrawn, as had the requirement to open up M-Pesa. The $120m deal, announced in September, received approval from the regulator, and was awaiting a final go-ahead from the CA. This was expected to be finalised in the fourth quarter of 2014.

Sweating It Out 

Other operators have faced difficulties in the local market as well. Orange Telekom Kenya, which is majority owned by France’s Orange alongside former government monopoly Telekom Kenya, saw a slight slide in market share in 2013, from roughly 2.5m subscriptions to 2.3m.

However, Orange has made it clear it intends to stay in the market, although France Telecom said it was conducting a strategic review of its businesses in both Kenya and Uganda, and has expressed interest in finding a strategic partner for its Kenyan venture. The government has declined to invest more for its part. Orange had planned a listing on the Nairobi Securities Exchange, but listing rules require companies to be profitable first. Orange lost KSh27bn ($307m) in 2010 and 2011, and a planned capital injection by the two shareholders in 2012 ended with a surprise when the government paid less than half of what was expected. For Orange, potential strategic partners or outright acquirers include MTN, one of Africa’s largest mobile telephony providers, an unnamed company in the UK and the Vietnamese state operator Viettel Group, according to local media reports. Viettel has expanded into countries including Laos, Cambodia, Haiti, Peru and Mozambique.

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The Report: Kenya 2014

Telecoms & IT chapter from The Report: Kenya 2014

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