Kenyans harvest billions from telecom investments

Inability to raise large sums of money needed to help their companies stay in step with the fast pace of growth in Kenya’s telecoms sector is forcing local shareholders to cede ownership leaving foreigners to dominate the business.

In recent months, local investors appear to have blinked at the prospect of being asked to help recapitalise the firms in readiness for the next round of heavy investment in the telecommunications sector.

The money required to build networks, forge strategic alliances and market the services is forcing locals to relinquish ownership to deep pocketed foreigners.

“These are fairly large deals that require the muscle of larger players to push through. At the same time, the smaller Kenyan shareholders are looking for exit routes to allow them harvest their investments – it’s a good time to sell,” said Mr George Odo, the East Africa managing director of Africa Invest Capital Partners, a private equity firm.

Some local investors have taken advantage of these shifts to reap from their investment — thanks to their early entry into the lucrative sector.

Mr James Gachuhi, the chairman of Wananchi Group, tops the list of local businessmen who have ceded significant portions of their shareholding in local telecom firms – selling half of his shareholding in the company to an American private equity group early this week.

The biggest exit from the fast-moving and capital intensive industry have however been by businessman Naushad Merali, who has recently diluted his shareholding in Zain Kenya – the country’s second largest mobile phone service provider, Kenya Data Networks and Swift Global.

These deals are estimated to be worth billions of shillings. Mr Merali is estimated to have reaped about Sh49 billion from the latest Zain deal alone when he reduced his shareholding from 20 to five per cent in the last six months.

This return is based on Zain’s valuation in 2004 when a 60 per cent stake held by Vivendi was sold to Celtel at $250 million, which valued the entire company at $416 million ( Sh332 billion at the then exchange of Sh80 per dollar).

Also in the same league are Peter Kibiriti and Jos Konzolo, who had to cede their stakes in mobile service provider Essar after they failed to match the Indian telecom giant’s equity input.

“Major realignments in shareholding are under way in the ICT industry. Many telecoms companies are now foreign-owned following the recent inflow of new equity from international sources,” say analysts at Kestrel Capital.

Though some of the local shareholders are ceding ownership in telecom firms to harvest their investment, people familiar with the industry say inability to raise money in the current business environment is forcing some to unwillingly take the exit option – a move that may prompt a review of the telecoms sector policies.

“Capping ownership could be detrimental to the industry’s growth,” said Mr Charles Njoroge, the Director-General of the Communications Commission of Kenya (CCK). “In Mr Merali’s case I believe the amounts he was required to invest in Zain was simply too much and he asked that a special consideration be made as he could not match the requirements.”

Rapid growth in the industry has demanded that shareholders continue to invest large sums of money in their businesses. Inability to raise the required equity capital has weakened the grip of some local owners on their firms sparking buyer frenzy among international investors keen to capitalize on the lucrative telecoms market.

This has slowly left the telecoms sector in the hands of foreign investors with financial muscle and technical expertise to boost the operations.