This weekend marks five years since Safaricom was listed at the Nairobi Securities Exchange after selling 10 billion shares to the public.
The event marked a watershed in Kenya’s capital markets and settled the argument whether there was the appetite and cash to support multi-billion-shilling calls.
Prompted by the government’s need to raise cash and give Kenyans bragging rights of owning a piece of the most profitable company in eastern Africa, the initial public offering (IPO) was historic for its sheer scale, the massive oversubscription and the revelation of Mobitelea, a shadowy investor in the company’s books.
To date, the faces behind Mobitelea, who have since sold their five per cent stake in the telco to London-based Vodafone, remains a mystery despite investigations by Parliament and UK’s Serious Fraud Office (SFO).
To investors, however, Safaricom’s IPO presents mixed fortunes and feelings. Along the way, some investors have made millions while others have lost a small fortune.
The company has had a remarkable performance and remains by far the most profitable business in the region, ring-fencing its fortunes by the proprietary money transfer service M-Pesa that was developed by Englishman Nick Hughes.
Economic outcomes of investing in the telco have largely been determined by the holding period, trading strategies, number of shares, and whether the shares were imprudently bought using bank loans.
An IPO of such a scale was also bound to magnify a number of problems in the capital markets and financial system, including outright fraud, profiteering by banks, and the mess that was the refunds and share registration processes.
The government came out ahead in the IPO, netting Sh51 billion for the 10 billion shares it sold to local and foreign investors who had placed in bids worth Sh231 billion or an oversubscription of 360 per cent.
The Treasury, which retains a 35 per cent stake in Safaricom, together with Vodafone (40 per cent) have earned billions of shillings in dividends, helped by their large share volumes and special status either as regulators or trading partners of the telco.
For retail investors, the company’s sterling performance has done little to cause excitement, with the majority earning dividends of less than Sh200 and whose cheques or M-Pesa credits can hardly be cashed economically.
Minority shareholders have over the years piled pressure on the company to buy back some of the floated shares in a move that would reduce supply and thereby drive up the stock’s price.
The board has, however, noted that Kenyan laws don’t allow share buybacks, adding that an alternative solution would be to get a strategic investor.
This has left small investors with the sole option of selling their shares at a higher price. This opportunity has, however, been absent for most of the past five years during which the stock traded at below the Sh5 IPO price, with the share flirting with the Sh2 mark for a while.
In the meantime the Telco has acquired more customers and diversified into the data business, helping it to maintain a strong performance that has finally fired up the stock.
The firm’s shares have traded above Sh5 since December and are currently priced at Sh7 apiece, offering small investors an opportunity to exit profitably.
The long share price stagnation proved a disaster for investors who took loans to buy the shares, forcing them to pay average interest rates of 15 per cent for securities they couldn’t trade profitably.
“Many investors incurred huge losses after initially securing easy loans from commercial banks to invest in the IPO,” the Capital Markets Authority noted in a review of the historic offer.
The regulator added that borrowers incurred hidden costs on the loans such as service charges of three per cent and that bankers held the shares as security until the amounts were paid back.
Perhaps the worst legacy of the IPO are the losses incurred by individuals and stock brokerage firms whose cash could not be refunded due to failure in the application and settlement systems.
CMA said there were cases of “incomplete, erroneous applications after the closure date and in certain incidents, rejection of applications.”
Mr Ngeye Kariuki, the founder of struggling stockbroker Ngenye Kariuki & Company, blames his firm’s collapse on the Safaricom IPO.
He says it left many stockbrokers in debt after the regulator ordered the intermediaries to pay investors’ refund claims running into hundreds of millions of shillings from their own resources. Efforts to reconcile the refund claims with Citibank, which was lead transaction adviser for the deal, were abandoned before completion.
CMA also noted the zero and near-zero bids by some stock brokerage firms that made bids for the role of transaction advisers in the IPO, observing that such tactics were unhealthy for competition.
It also noted conflict of interest as the same firm could double up as an adviser and placing agent. Local stock brokers were competing against international firms like Morgan Stanley that had for the first time sought to participate in a Kenyan IPO.
Some wily investors managed to beat the share allocation quotas — a maximum of 2,000 shares for local individuals —by making multiple applications using different accounts. This helped them to overcome the problem of holding a small number of shares whose dividend income is hardly enough to pay for the transaction fees.
The scramble for Safaricom’s stock was helped by the lucrative returns seen in the 2006 KenGen IPO where the power producer’s share price more than tripled after listing the offer at Sh11.90 per share.
Safaricom’s retail investors could however not replicate the profit-taking seen in KenGen’s offer, forcing the patient among them to become long-term investors in the telco. That bet has now started paying off if the company’s historical performance is anything to go by.
Safaricom made a net profit of Sh17.5 billion in the year ended March, growing 38.8 per cent compared to Sh12.6 billion a year earlier as sales jumped 16.1 per cent to Sh124.2 billion.
Analysts remain bullish about Safaricom’s prospects going forward, attributing their confidence to the firm’s dominant position and diversification of earnings.
With a customer base approaching 20 million, Safaricom has managed to attract and retain customers despite increased competition from Airtel and Telkom Kenya while expanding its presence in the data, ICT hardware, and financial services market.
Safaricom’s aggressive expansion of its M-Pesa and data services has helped maintain its profit momentum despite the vicious price wars in the voice business that has seen tariffs drop from Sh8 to an average of Sh3 in three years.
The telco earned 87 per cent of its Sh41.5 billion total revenues in 2008 from voice calls but it has cut that share to 62 per cent of the Sh124.2 billion it generated in the year ended March.
M-Pesa, data and SMS are the company’s fastest growing non-voice business, raking in Sh21.8 billion and Sh18.5 billion in the year to March. Analysts at StratLink Africa expect Safaricom’s revenues and dividends to grow by double digits in the current financial year, signalling increased earning and a sustained high stock price for investors.
While Safaricom represents the ultimate business success story, its listing at the Nairobi Securities Exchange presents mixed fortunes owing to its large size.
“Due to its sheer size, the listing of Safaricom shares portends a market risk accounting for a significant percentage of market capitalization and trading volumes,” CMA said in its review.
The IPO nearly doubled the number of investors at the NSE from 800,000 to a 1.5 million and Safaricom’s listing of 40 billion shares has seen it account for between 15 and 25 per cent of total equities turnover and market capitalisation.
This means that Safaricom is the most liquid counter and its movement has a huge bearing on other stocks and overall market performance.