Business Daily (Nairobi)
Geoffrey Irungu
20 January 2008
Nairobi — The post-election political turmoil that has gripped Kenya has sent the Government's transaction advisors on the privatisation of Safaricom back to the drawing board to determine how to price the shares.
It was expected before the election that Safaricom could fetch anything between Sh56 billion to Sh75 billion. This is cash that the Treasury desperately needs to bridge a Budget deficit, which though it was estimated at Sh110 billion last year could be higher as pledges for economic aid from foreign governments are not honoured due to the current political crisis.
The strategy last December was to target millions of ordinary Kenyans to buy into the IPO, for as low as Sh5 a share. But now, political and country risk, an assumption that is usually inserted in IPO prospectus and bond indentures as a boilerplate warning is now unravelling as a real threat to the outcome of the issue.
The other risk factor that has unravelled and that is likely to have material impact on Safaricom earnings outlook is the volatility and depreciation of various international foreign currencies against the shilling.
Safaricom generates its revenues, but has major loans for equipment, which it pays in dollars and euros, creating a foreign exchange loss (or gains) exposure. This has more than elevated the handling of investor perceptions, a major priority item in an IPO process that was expected to be a walk in the park.
Though political risks usually are a major concern to foreign investors, locally, the violence has spooked small investors and kept the currency markets jittery. Now with the advisors starting to factor political risks in the valuation of the IPO, there are expectations they will factor a higher discount rate, which would lower the value of the shares for a company that is considered the largest in the east African region by both sales at Sh46 billion and pre-tax profits at Sh18 billion.
The fear among advisors is that the IPO may not be greeted with as much euphoria as the other issues listed on the NSE last year and therefore cannot be expected to fetch the amount it would have initially earned had it been offered before elections or had there been no post-poll riots and demonstrations.
This would not stop the issue from being successful because the biggest worry among rich investors locally and abroad was that there would not be enough shares allocated to them if millions of ordinary investors with little money were roped in. It will therefore favour the rich investors if the small investors fail to buy.
The effect of the political risk has also translated into a business risk.
Safaricom in the wake of the political violence reported that it had lost Sh400 million in airtime sales because of the crisis as transport of goods became impossible in many parts of the country.
Analysts said the extent of the lost value in the company would have to be determined after all factors have been taken into account but said it was unlikely to be beyond 10 per cent of the original valuation, unless the crisis in the country escalates.
Initially the company's 25 per cent shareholding that would be on offer was put at a value of Sh56-75 billion. A loss of 10 per cent would amount to reducing the portion on sale to Sh50 billion on the lower side and Sh68 billion on the higher side with the later increasingly unlikely as the political crisis hit the company's prospects.
The draft prospectus seen by the Business Daily had warned of the possible risks to the IPO, which included country risk, for foreign investors.
Another factor that has unravelled is foreign currency exchange risk, which has material implications regarding the company's capital expenditure.
The prospectus drew attention to the fact that most of the company's capital expenditure is denominated in euros and dollars while its revenues are mainly denominated in Kenya shillings.
With the Kenyan currency having depreciated sharply from around Sh62-64 to the dollar in November 2007 to Sh67-68 currently, the company will pay more for such expenditure.
In terms of euros, the shilling has depreciated to Sh99-101 compared to the end of November Sh94-95.
Thus, the prospectus had said, no assurance could be given that fluctuations in the exchange rates of the Kenya Shilling against the euro and the dollar would not have adverse material effect on Safaricom's business.
To mitigate against adverse currency effects, the firm has made hedging arrangements but the prospectus does not disclose to what extent this has taken place.
Within only days of the outbreak of violence after the poll, Standard and Poor's Rating Services downgraded long-term local currency rating for Kenya to 'B+' from 'BB-'. At the same time, the agency placed both its long-term foreign and local currency 'B+' ratings on 'creditwatch', which has negative implications as it means that the country is being watched closely due to higher chances of defaulting on foreign loans.
"These rating actions follow widespread violence and civil disturbances in the wake of the disputed results of the presidential election held on 27 December 2007," said Konrad Reuss, Standard & Poor's managing director for South Africa and Sub-Saharan Africa.
S&P said that in the absence of a dialogue between the two sides, the potential existed for the violence, which had become ethnic, to continue. Indeed, the statement added, the longer the situation remained unresolved, the more likely it was to affect Kenya's domestic debt market and balance of payments.
"If the political situation and its multiple social and economic ramifications do not improve over the course of the next month, a lowering of both the foreign and local currency ratings is likely," Reuss said.
Mr James Murigu, the CEO of Suntra Investment Bank - that has been involved in several IPOs in the past year - said that he expected the valuation of the company to go down but only by a small margin.
"We have to see a see a lower valuation with the crisis. What we need to establish is by how much the crisis could have dented the value of the company," he said.
He said that the sale should still take place because many Kenyans were waiting for it as they saw it as yet another investment opportunity.
The sale of the company was likely to bring back confidence in the economy that was currently experiencing problems due to the political crisis, he said noting that even the Safaricom CEO Michael Joseph had recently stated as much.
Mr Job Kihumba, the executive director at Standard Investment Bank, said that the IPO's valuation would be slightly lower in view of the projections of the economic performance for the year, depreciation of the Kenya currency against the hard currencies and the international rating by S&P.
"The extent of the reduced valuation is difficult to determine exactly because of the many factors involved. This would have to be done professionally," Mr Kihumba said.
He however added that there would be mitigating circumstances if the company's costs were lower compared to the revenues generated.
"Those who buy for the long haul will invest without a lot of misgivings but those who are out to speculate may have some doubts. That means that the company has to sell at a higher discount than earlier projected," said Mr Kihumba.
It had been estimated that a share in the IPO would go for as low as Sh5. With a lower valuation, the price may go down further but on the other hand, the advisors may decide to have more shares on offer at the same price instead of a lower price. With a lower valuation of Sh50 billion for the 25 per cent shareholding and at Sh5 a share, 10 billion shares would be on offer.
Another source closely involved in the transaction said on condition of anonymity - since he is not the official spokesperson for the deal - that the valuation was definitely likely to come down and the transaction advisor had no choice but to go back to the drawing board.
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