M-Pesa pact earns Vodafone Sh2bn in licence payments
Safaricom, Kenya’s leading telecoms operator, has paid Vodafone nearly Sh2 billion from M-Pesa in the form of licence fees as provided for under an agreement that the two companies signed before the launch of the mobile money platform five years ago.
A revenue sharing pact that Safaricom signed with its parent company, Vodafone, has earned the UK firm nearly Sh2 billion from M-Pesa, the money transfer service.
Safaricom, Kenya’s leading telecoms operator, has paid Vodafone the money in the form of licence fees as provided for under an agreement that the two companies signed before the launch of the mobile money platform five years ago.
Vodafone, which is the single largest shareholder in Safaricom with a 40 per cent stake, holds proprietary rights over M-Pesa through Vodafone Sales and Services Limited (VSSL), an affiliate of the British firm.
Vodafone has been earning royalties of between 10 per cent and 25 per cent of M-Pesa’s annual revenues since February 23, 2007, under a five-year agreement and has struck a new deal that guarantees it billions of shillings of the mobile money revenues in the next five years.
The UK firm is estimated to have pocketed Sh1.9 billion of the Sh16.87 billion revenues that M-Pesa generated in the year to March – up from the Sh1.4 billion it earned the previous year.
The revenue sharing agreement makes Vodafone the biggest beneficiary of Safaricom’s fastest growing business line, raising its total take-home to Sh5.4 billion in the year to March.
Besides the licence fees, the UK firm will earn Sh3.5 billion in dividends for its 40 per cent stake in the Kenyan associate.
The initial five year M-Pesa revenue sharing agreement came to an end on February 22 but a new agreement has been signed, keeping Vodafone’s commissions at between 10 per cent and 25 per cent.
“We signed a contract extension with Vodafone on a modified agreement but the license fee remains unchanged,” Bob Collymore, the CEO of Safaricom told the Business Daily in an interview on Tuesday.
The fee is payable quarterly and is capped at 25 per cent of every quarter’s revenue from a floor of 10 per cent.
Under the agreement, the payout to Vodafone moves closer to the lower threshold with an increase in the number of active M-Pesa subscribers.
The number of active M-Pesa users grew marginally to 14.9 million in the year to March compared to 14.01 million in the previous year. This leaves the commission rate close to the previous year’s level of 11 per cent.
Analysts at Kestrel Capital estimate that Vodafone earned 11.5 per cent in M-Pesa royalties during the year to March.
Most analysts said they expected that Safaricom and Vodafone would sign a hybrid agreement that ties the license fees to M-Pesa profit and revenues rather than revenues alone because the mobile money service is now profitable and has become a key revenue driver for Safaricom.
M-Pesa accounted for 16 per cent of Safaricom revenues of Sh107 billion in the 12 months to March compared to four per cent in 2009.
Although Safaricom does not disclose the net profit it generates from M-Pesa, Mr Collymore said the money transfer service had just broken even.
M-Pesa is also seen as a pivotal arm of Safaricom’s operations that has helped sharpen the telecom giant’s competitive edge by locking in some subscribers in a market marked with cutthroat competition.
Safaricom has successfully grown M-Pesa since the service was launched in March 2007 to 15 million subscribers.
By the end of March last year, the cumulative worth of M-Pesa transactions stood at Sh828 billion or an average of Sh17 billion a month.
Revenues have grown from Sh370 million in 2008 to Sh16.87 billion in the year to March.
“The licence fee is the fruit of an innovation that has turned out well,” said Eric Musau, an analyst with Standard Investment Bank, adding that in Kenya, mobile money transfer service has grown faster than in any other market.
M-Pesa is presently aiming at getting a larger share of the corporate business, especially transactions between businesses and individuals in the small and medium enterprises (SMEs) realm.
Vodafone’s multi-billion earnings from Safaricom come at a moment when multinationals with majority stakes in firms listed at the Nairobi Securities Exchange have emerged as key beneficiaries of the rise in dividend payouts from corporate Kenya.
This underlines the growing importance of emerging economies in cushioning earnings of parent companies based in troubled markets such as Europe.
The global giants including BAT, Barclays PLC, Diageo Plc, Linde Group and Lafarge will be sending more money to their parent companies this year compared to last year helped by corporate Kenya’s growing shift towards steady growth in dividend payouts.
The bulk of the companies have recorded double-digit growth in dividend payments this year on the back of robust earnings growth that left many Kenyan companies with cash piles that most have chosen to give back to shareholders.
Barclays Plc earned Sh5.5 billion this year for its 68.5 per cent stake in the Kenyan affiliate, up from Sh5 billion last year.
French conglomerate Lafarge - which owns 58.6 per cent of Bamburi Cement - will take home Sh2.1 billion up from Sh1.8 billion in 2011 while BAT earned its parent company Sh1.8 billion from last year’s Sh1 billion.
Safaricom’s new deal with Vodafone comes at a time when the UK firm is tightening its grip on the operations of Safaricom with appointments of senior executives to the board of the Kenyan firm.
The appointments have effectively reduced the role of the government - which has a 35 per cent stake in Safaricom - in the running of the company.
Vodafone has since the launch of Safaricom 10 years ago reserved the right to appoint the CEO and Chief Finance Officer of the Kenyan firm.
Critical muscle
At the board level, the number of Vodafone representatives has increased from three in 2008 when it had Michael Joseph as CEO and directors - Mr Collymore and Gavin Darby - to five, giving the UK firm a critical muscle in Safaricom.
The government has three seats in the board represented by Esther Koimett (the investment secretary at Treasury), Susan Mudhune and Nicholas Nganga (chairman).
Vodafone is represented by Mr Collymore, Timothy Harrabin, Karen Witts and Nicholas Read.
It’s not clear whose interests Michael Joseph represents in the board, but he is likely to side with Vodafone led the company for 10 years.
Besides M-Pesa and dividends, other sources of revenue for Vodafone’s trading with Safaricom includes marketing and roaming using the Vodafone brand and payment of goods and services to the UK firm.
