India's Essar takes Sh37bn hit from sale of yuMobile [Business Daily (Kenya)]
(Business Daily (Kenya) Via Acquire Media NewsEdge) Indian company Essar Telecoms has booked a Sh37 billion loss from the sale of yuMobile to Safaricom and Airtel.
Essar which entered the Kenyan market in 2007 yesterday told the Business Daily that it had invested Sh48 billion ($550 million) over the eight-year period, and disposing of the outfit at Sh11 billion, means that it is exiting at a loss.
Safaricom is expected to pay Sh7 billion to acquire yuMobile's Network, IT and Office Infrastructure while Airtel will pay Sh4 billion for the 2.5 million subscribers that the fourth mobile operator has and its current operating licence.
"Essar heavily invested in this market, $550 million up to date, and yes I can say we are exiting at a loss," said yuMobile chief executive Madhur Taneja in an interview.
yuMobile's exit at a loss and the ongoing negotiations with potential buyers by France Telecoms which owns 70 per cent shares of Telkom Kenya revives the question of how many mobile telco operators the market can profitably accommodate while offering affordable services to users.
"We have already factored the losses in our annual operating expenses, so the funds to cover the liabilities will come from the parent company," he added.
Mr Taneja said the decision to exit the Kenyan market came after its parent owners realised that the huge amount of investment it was making in the firm may not be possible to recoup within a reasonable time frame.
yuMobile has been struggling to break even since it entered the Kenyan market as the fourth operator and has been relying on its parent company and loans to run its business. Its performance was worsened by a price war in August 2010, triggered by Zain (currently Airtel) that even pushed the market leader Safaricom to report a drop in profit for the first time as its rivals sank deeper into losses.
READ: Airtel to retain yuMobile brand for two years
"Essar did whatever it could do, as you can see we heavily invested in the market but this did not bear any fruit, and at the end Essar decided that it won't continue pumping in more money and had to move out." Mr Taneja said.
He said based on the company's experience, the Kenyan market is not ready for a large number of telcos.
"This is a capital intensive sector and taking into account the duration it may take before an operator starts realising a return on investment, I don't think the Kenya market can accommodate more than three operators," he added.
Essar Capital expects the transaction to conclude during the fourth quarter of this year.
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