Safaricom’s #ticker:SCOM bank borrowings rose to a record Sh76.9 billion in the half-year ended September as the telco raised funds to pay for its Ethiopian licence besides investing in its operations.
The company’s debt increased 5.2 times from Sh14.7 billion a year earlier, making the telco one of the biggest corporate borrowers alongside other firms such as KenGen, Kenya Airways and Kenya Power.
Safaricom noted that it held cash and cash equivalents of Sh26.4 billion in the review period, placing its net debt at Sh50.5 billion.
In its early life as a publicly-traded company, the telco used to fund its growth through debt, but it weaned itself off medium to long-term debt as its cash generation exceeded reinvestment needs.
The Ethiopian venture, however, requires major investment which will see Safaricom further increase its borrowings given its role as the major shareholder of the new business with a 55.7 percent stake.
Out of the Sh76.9 billion borrowing, Sh62.2 billion is in the form of short-term debt. Safaricom says it will convert some of the short-term loans into long-term facilities to manage currency risks and improve its working capital position.
"To support the payment of licence fees for the telecommunications licence awarded to the Safaricom-led consortium by the Government of Ethiopia, we undertook a one-year bridge facility of $400 million (Sh44.8 billion) to finance this venture," Safaricom said in a statement.
"We are currently seeking to term out the bridge facility through a long-term arrangement so as to manage our working capital requirements in the short term and minimise the currency risk for the dollar loan."
The consortium, which includes South Africa’s Vodacom Group, paid a total of $850 million (Sh94.9 billion) for the licence.
Safaricom said it is investing an initial $600 million (Sh67 billion) in Ethiopia as part of its contribution to the consortium’s total investment pledge of $8 billion (Sh894 billion) over 10 years excluding the cost of the licence.
It remains to be seen whether the telco will change its dividend policy as a result of the huge capital requirements in the Ethiopian venture.
Safaricom has been distributing at least 80 percent of its net income to shareholders, leaving the remaining 20 percent for reinvestment in infrastructure and retained earnings, which now stand at Sh133.7 billion.
The telco could tap the retained earnings to partially fund its Ethiopian commitments.
Its parent company Vodacom Group has meanwhile told shareholders that it will lower its dividend payout rate from 90 percent to 75 percent of ordinary income as a result of its proposed acquisition of a 55 percent stake in Vodafone Egypt.
Safaricom says it will fund the Ethiopian investment through its own funds and loans from local banks and development finance institutions.
"We are expecting a capital expenditure of between $1.5 billion (Sh167 billion) and $2 billion (Sh223 billion) over the next five years to meet the licence coverage obligations," Safaricom’s chief executive Peter Ndegwa said of the initial Ethiopia investments by the consortium.
The telco’s need to borrow more funds long-term is set to benefit local banks whose other big clients are blue-chip companies such as East African Breweries Plc and State-owned firms such as KenGen and Kenya Power.
The major borrowers offer banks an opportunity to make a few big loans in local currency as well as dollars, diversifying their loan portfolios.
Top banks led by Equity, KCB and Co-op Bank have increased their capacity to lend tens of billions of shillings to a single customer.
Banks also leverage the lending relationships to win deposits and other businesses from their big clients, including forex deals and advisory services.
Most of the borrowings are, however, expected to be sourced from sovereign wealth funds and development finance institutions which have much deeper pockets and can lend over periods lasting more than a decade.
The consortium had sought a $500 million (Sh55.9 billion) loan from the US International Development Finance Corporation (DFC).
The American State agency has, however, delayed disbursement of the funds, citing uncertainty over the ongoing unrest in Ethiopia.
DFC says it is working closely with its partner agencies in the US government to monitor the situation and will carefully consider its impact on any potential financing of the consortium.
Safaricom says the investment in Ethiopia could pay off from the fifth year but notes that the violence in that country could stretch the profitability timelines.
"Together with our partners we have availed [sic] funding to support this new venture which we anticipate to break-even by year four of operations," Mr Ndegwa said.
"Our break-even target may be significantly impacted by the impact of the current conflict on the launch of operations which we target by mid-2022."
Mr Ndegwa said Safaricom believes the opportunities in Ethiopia outweigh the risks. The telco sees Ethiopian venture as presenting a huge growth opportunity in a market of 110 million people and which has previously relied exclusively on the State-owned Ethio Telecom.
Ethiopia recently announced that Safaricom will be allowed to offer mobile money services after Ethio Telecom, making its licence more valuable.
The Ethiopian venture is set to slow down the momentum of Safaricom’s profit growth in the medium term as significant cash flows from the Kenyan operation will be used to fund the new business. Once profitable, the Ethiopian subsidiary will turbocharge the telco’s consolidated earnings.