Safaricom saves billions in new deal with Vodafone

Telecoms operator Safaricom has renegotiated its procurement agreement with Vodafone Plc, cutting down the Sh2.1 billion annual fees the UK company has been earning from the Kenyan firm in the past couple of years.

Also read: M-Pesa pact earns Vodafone Sh2bn in licence payments

Vodafone Plc, which is the single largest shareholder in Safaricom, earned the money through an agreement that guaranteed it a six per cent commission on all supplies obtained through the UK firm’s sales and services arm.

Safaricom has been riding on Vodafone Sales and Services Limited’s global price book, supply chain and technical expertise in the sourcing of the equipment.

Kenya’s leading telecoms operator bought goods and services worth Sh35 billion last year, translating to a commission of Sh2.1 billion for Vodafone – at the rate of six per cent.

But under the new agreement that came into effect in the year ended March 2012, Safaricom paid a flat fee of €4 million (Sh412 million), cutting the Sh2.1 billion commission paid under the old agreement by 80 per cent.

Bob Collymore, the Safaricom chief executive, said the new deal has since coming into effect to date saved the company over €40 million (Sh4.1 billion).

“We have converted from a variable to a fixed rate for greater certainty and to secure a more favourable deal for Safaricom,” he said.

Though a huge relief to the Kenyan telecom operator, the new agreement highlights the lopsided nature of the previous contract, which saw Vodafone’s commission average Sh2.1 billion annually or nearly a fifth of Safaricom’s net profit in the past two years.

Aside from the commission on the procurement deals, Vodafone earns dividends and licence fees for Safaricom’s revolutionary money transfer service, M-Pesa.

Mr Collymore said that although the flat rate will rise to €6 million (Sh618 million) in the current financial year, the new deal continues to save the company billions of shillings for its purchases of mobile phones, computers, and telecoms equipment.

“All of our Sh35 billion spend is being negotiated … we are now able to access greater cost savings at a significantly reduced participation fee,” he said.

Investors will be waiting to see the impact of the massive cost savings on Safaricom’s earnings, which have come under pressure from a vicious price war in the voice market – its biggest revenue stream.

Safaricom’s net profit dropped to Sh12.6 billion in the year ended March compared to Sh13.1 billion the year before as higher operation costs pulled back the rate of revenue growth to 13 per cent for a total of Sh107 billion.

Safaricom has been spending billions of shillings in network upgrade even as it expands coverage of voice and data services to keep pace with its growing customer base.