A major scramble for spectrum — the airwaves that carry telecommunication signals — is looming, even as authorities in Kenya ponder the implications of the impending exit from the marketplace of two mobile phone operators — yuMobile and Orange.

Two foreign investors, Essar of India and France Telecom, who own yuMobile and Orange respectively, have already given notice that they will be leaving the Kenyan market.

The stakes are high indeed because, depending on how the exit of these two players is managed, their departure could free up a significant band of spectrum, including what was originally allocated for older technologies.

The explosion in the demand for data traffic in Kenya has placed a very high premium on spectrum. The explosion is mainly driven by an unprecedented penetration of the Kenyan market by data-connected devices such as smartphones and tablets that drive network traffic far more than traditional devices such as basic phones.

In particular, the exponential growth in consumer demand for data-heavy applications and videos has put enormous pressure on services that use wireless spectrum.

The upshot is that companies now fear that their existing spectrum allocations may soon be overwhelmed, leading to slower connections, longer download times and more call drops.

This backdrop may explain the recent bid by market leader Safaricom to acquire the spectrum of the exiting yuMobile.

With the stakes so high, the looming spectrum crunch in Kenya is inevitably going to evolve into a game of big money and big politics, complete with the intrigues and backroom dealings that inevitably happen in Kenya whenever deals involving big money are on the cards.

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The events surrounding the Safaricom application provided a rare glimpse of the kind of intrigues likely to come into play as the battle over spectrum freed by the exiting players is joined.

Out of the blue, in the middle of deliberations over the application by Safaricom, a Nigerian entity by the name Megatech Engineering Ltd popped out of the woodwork seeking the nod of the regulator to purchase yuMobile.

Nigerian application

Simultaneously, the Nigerians also put in an application for a nationwide licence in Kenya. A letter to the regulator, the Communications Authority of Kenya (CAK, former CCK) stated, “Our request is for the following: First, spectrum in the 800MHZ (20MHZ) range and secondly, spectrum frequency licence 2.5 GHZ (50MHZ) LTE FDD national approval licence.”

Said to have friends in high places in Kenya, representatives of the Nigerians flew into town in a private jet and started pulling strings and lobbying to be allowed to purchase the company.

The chairman and CEO of the group, Aliyu Abubakar, wrote to CCK confirming their interest in purchasing yuMobile.

The EastAfrican confirmed from yuMobile that the Nigerians indeed contacted the vice president of Essar Services India Ltd in charge of mergers and acquisitions, Jayan Dsouza, with an offer to purchase the mobile operator.

According to correspondence seen by The EastAfrican, the Nigerians offered to purchase the company for an enterprise value of $200 million.
But doubts lingered about the bona fides of the big-talking Nigerians.

In the first place, reports out of newspapers in Nigeria mention names of some of the figures behind Megatech Engineering in terms that are less than flattering. As a matter of fact, yuMobile itself also questioned the credentials of the Nigerians.

The CEO of yuMobile, Madhur Taneja, disclosed that when the Nigerians first contacted Essar Services of India, they claimed they had links with mobile operator Etisalat and the Mubadala Group of the United Arab Emirates. Mubadala is a $55 billion sovereign wealth fund owned by the governments of the UAE.

But when Essar Services contacted Etisalat and Mubadala through the French investment banking group BNP Paribas, the two disclaimed any link with the Nigerians.

“We can’t establish the credentials of the persons claiming to represent Mubadala and Etisalat,” said Mr Taneja in response to questions by the press, adding that as far as yuMobile was concerned, the only deal on the table was the one with Safaricom and Airtel.

“We are engaged in discussions with Safaricom and Airtel and we stand committed to the proposed transaction,” he stressed.

The CAK has set at least 14 conditions that mobile companies Safaricom and Airtel have to meet in order to be allowed to acquire yuMobile’s assets. The most controversial of them all is the demand that Safaricom must share its money transfer and Sim card registration centres with its rivals.

Safaricom is looking to acquire yuMobile’s infrastructure, while Airtel wants to acquire the firm’s 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.

The deal is said to be valued at about Ksh8.6 billion ($100 million).

From the beginning, it seems, the predisposition of the CAK was to kill the deal outright. A technical committee appointed by director-general Francis Wangusi to consider the application by Safaricom and Airtel initially rejected the proposal.

The committee argued that allowing Safaricom to acquire spectrum currently being used by yuMobile would amount to concentrating too many resources in the hands of one player and recommended that yuMobile’s spectrum be surrendered to the regulator for assignment to other players, including new entrants.

Safaricom’s main argument in its application was that it needed the additional spectrum held by yuMobile to allow it to provide better network coverage and quality of service.

But in a report, the CAK’s technical committee dismissed the argument on the grounds that spectrum is not a big factor when it comes to quality of service and that what is critical is network design.

Worldwide, major telecommunication companies have been trying to increase their spectrum holdings through mergers, acquisitions and spectrum swaps.
With the yuMobile deal now in abeyance, it remains to be seen how the Orange case will play out.

Apparently, the government is yet to think through how to manage the exit of Orange.

Co-owned by the government and France Telecom in a ratio of 70 per cent for the French company and 30 per cent for the state, the company is in dire financial straits.

In 2012, in accordance with the shareholders agreement, the two owners were called upon to fund  a balance sheet restructuring exercise  that was supposed to get the company out of insolvency.

With the government having failed to put in its share of the cost of restructuring the company’s balance sheet, the shares of the government were diluted from the original 49 per cent down to 30 per cent.

Two years later, the company is headed back to insolvency.

According to audited accounts, annual revenue stood at Ksh9.4 billion ($110.5 million). Considering that Safaricom’s monthly revenues are at around Ksh12 billion ($141.2 million), Orange is truly in distress.

Its average revenue per user (ARPU) is a third of Safaricom’s at Ksh191 ($2.2), compared with approximately Ksh546 ($6.4) for Safaricom.

Capital and reserves have dwindled from Ksh16.6 billion ($195.3 million), following the restructuring, to Ksh7.5 billion ($88.2 million) in December 2013, mainly as a result of the  Ksh9.1 billion ($107 million) loss in 2013.