Business Daily (Nairobi)
Kui Kinyanjui
2 March 2008
Nairobi — It was on everyone's lips until the beginning of this year when the desperate search for peace, justice and stability cast dark clouds over its future.
It is therefore not surprising that with the signing of an agreement that promises political stability and better economic prospects, the sale of a portion of Safaricom is back on the radar screen as if it was never gone.
Market watchers are now confident that the timing of the flotation will be made public soon with indications that only final resolutions by the mobile phone company's two shareholders -Treasury and Vodafone Kenya - are yet to be reached.
Although the regulator, the Capital Markets Authority, has not received final documents on the sale, transaction advisors consider it a matter of course.
"We do not foresee a problem with the CMA and the Nairobi Stock Exchange. We addressed the issues raised by the CMA last year," said Mr Mohammed Hassan of Dyer and Blair Investment Bank, the lead transaction advisor.
The pricing of the Sh55 billion sale would be discussed as soon as the actual date was known, he said. It is understood that the two shareholders met on Friday last week in what sources called normal consultations.
Offer prices ranging from Sh3.50 to Sh5.00 per share have been mentioned and are seen as increasingly likely as the country seeks to restore investor confidence following the political crisis.
Last year, a preliminary valuation of Safaricom by investment bankers Morgan Stanley put the net worth of the company at Sh221 billion. The depressed investor confidence in Kenya, however, may mean a further discount of the company's value for the IPO to be successful.
"Right now, it's better to err on the side of investors - the country risk factor has gone up. For me a priority would be to discount to get trust and interest back," said Mr Aly Khan Satchu, an investment strategist at Rich Management.
The shareholder meeting, together with the signing of the power sharing agreement between the government and the opposition ending uncertainties, has been read to mean the IPO is around the corner.
The Nairobi Stock Exchange reacted to the settlement with a threefold jump in daily turnover from Sh287 million to Sh800 million, suggesting the investment mood is bullish.
"There are early indicators that the market is now ready to move on the IPO. We have already seen an increase in demand on all counters. Renewed confidence should help speed up processes at all levels," said Mr Job Kihumba, an executive director at Standard Investment Bank.
The Treasury is understood to have pencilled a three-week sale period starting mid this month with a view to have floated shares start trading at the Nairobi Stock Exchange in early May.
Since Safaricom emerged as East Africa's post profitable company in 2006 on the back of mobile phone use spreading across the country like bushfire, investors have been longing for a chance to own a slice of the company.
More interest is bound to be rekindled by news that the company, with a subscriber base of 9.2 million, has already surpassed Sh20 billion in earnings before income tax, depreciation and amortisation (EBITDA). For the year to March 2006 the earnings were Sh17.2 billion.
Updated returns for the nine months to December 2007 seen by The Business Daily show the company reaped substantially more from the benefits of a growing customer base and the favourable economic conditions that characterized most of last year.
Operating profit, at Sh14 billion, is also higher than the Sh12.6 billion made over the corresponding period in 2006 as is profit before tax at Sh15.7 billion compared to Sh12.1 billion previously.
By December last year, revenues also increased to Sh45 billion, compared to Sh34 million the year before, while operating expenses increased to Sh19 billion from Sh13 billion the previous year.
But even as indicators point to the mobile giant retaining its prestige as the country's richest company, investors need to consider that 2008 could mark a watershed year for a company used to riding the coat-tails of seemingly effortless success.
Topping CEO Michael Joseph's agenda this year will be the defence of the company's 9.2 million strong voice subscribers from a growing and more aggressive competition; shielding its profits by introducing new product lines; and, if other considerations do not hold sway, managing the biggest IPO in the continent's history.
Analysts point out that the big wins of 2007 may not be so easy to replicate in 2008.
"While there is no doubt that Safaricom's core business will continue to grow organically in the coming years, historically over time, companies like Safaricom have been forced to attribute lower value to pre-paid subscribers," said Mr Satchu.
Pre-paid subscribers comprise 9.1 million of Safaricom's business, but are not necessarily the most profitable type of customer. In order to maintain growth, the time may have come for Safaricom to contemplate a new line of business.
The reasoning is simple. Unlike consumers of other goods, mobile customers over the last year have been able to use less of their money to do more.
While the price of a bottle of beer has gone up to Sh120, up from Sh100 a year ago; a Sh100 scratch card from Safaricom will let you speak for over 10 minutes, up from just four minutes a year ago.
This means that the company is now handling lower ARPU (Average Price per User) margins, meaning profits are being eaten into by the ongoing price war between the telephony players. ARPU figures are generally used to gauge the success of telephony firms.
During the nine month period ended December 2007, Safaricom's blended ARPU rates dropped to Sh650 from Sh816 in 2006, with pre-paid ARPU dropping from Sh583 from Sh705.
While the company has gained more subscribers, they spend less. The new ARPU rates reflect the company's strategy for most of 2007, which saw it nearly double its subscriber base from five million users in 2006 after an aggressive rural campaign.
On the other hand, the company is also doing a better job of retaining customers on its network, with the rate at which subscribers switch from the network, falling from 39 to 23 per cent.
This is partly attributable to the Bonga loyalty programme which rewards subscribers the more they top up and use airtime.
"Serving rural areas is going to continue to be a key focus for this company going forward. That segment, coupled with our investment in new areas such as data, form new revenue centres we can rely on," said Mr Joseph.
To achieve increased rural penetration, the company spent heavily on infrastructure, with over Sh18 billion used on enhancing switching capacity, rolling out in rural areas, and expanding the core capabilities of the network.
But signs indicate that growing competition and reduced profit margins from active customers coupled with increased spending could forecast reduced earnings for the company in coming years.
This is a challenge common with most mobile operators in countries across the world as markets near saturation in the face of aggressive competition.
Faced with similar situations in other markets, telephony companies have either adopted aggressive acquisition strategies to maintain the core calling business or have diversified their business interests to new areas.
"I see the disruptive force for Safaricom coming from M-Pesa and its diversification into financial services. This is one area that is certainly going to drive the future profits of this company. Most people underestimate the importance of the product," said Mr Satchu.
Vodafone, which currently owns 35 per cent of the mobile services company, did both last year, buying several small companies but also diversifying into new areas.
Data now forms a key part of the company's revenue stream, with group data revenue up 51 per cent, in the last year.
"Clearly as we go into 2008 there will be challenges, because the voice-driven macro-economic environment in the more developed countries is clearly slowing down," said Arun Sarin, Vodafone CEO.
Mr Sarin predicted that in coming years, Vodafone would be in direct competition with firms such as Microsoft, or Google, as convergence brought markets like voice calls and internet service provision together.
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