Safaricom #ticker:SCOM will borrow billions of shillings to fund its expansion into Ethiopia if a consortium it is leading wins one of two telecommunications licences being auctioned in that market.
The company will have a controlling 51 percent stake in the consortium, meaning that it will shoulder most of the financial investment that is expected to top the $1 billion (Sh109 billion) mark.
The Nairobi Securities Exchange-listed firm sees Ethiopia, a market with more than 100 million people and relatively lower uptake of mobile and broadband services, as presenting significant growth opportunities.
“Obviously if we are successful in the bid in Ethiopia there’ll be additional debt taken on our balance sheet,” Ilanna Darcy, Safaricom’s acting chief financial officer, said on November 9 when the firm announced its results for the half year ended September.
The telco says the size and type of debt –bank borrowings or corporate bond — will become clear at a later date.
Safaricom will, however, take longer-term debt to fund the Ethiopia venture in a departure from its current practice of taking short-term bank loans, which it pays within one year.
The company recently raised its bank borrowings to a new high of Sh32.7 billion to fund capital expenditure and pay dividends, with Ms Darcy saying most of the debt will be settled by March next year.
“Together with other partners we are exploring best option for market entry based on the bidding process,” Safaricom’s chief executive, Peter Ndegwa, said of the potential Ethiopia investment.
“We are not able to give further details on consortium composition, funding structure, capital expenditure amongst other details until the appropriate time.”
He added that the firm was interested in the Ethiopian market where the government has started the licensing process.
South Africa’s Vodacom Group, which has a 35 per cent stake in Safaricom, on Monday disclosed more details of their Ethiopia joint investment plans.
“Finally, the group’s bid for licence in Ethiopia will be done through a consortium led by Safaricom, which has submitted the expression of interest to the Ethiopian telecom authorities,” Vodacom CEO Shameel Joosub said in an earnings call.
“Safaricom will lead our consortium with a 51 per cent stake. The remainder will be taken up by strategic financial investors. We as Vodacom will take a small direct minority position of around five per cent in the consortium.”
The Ethiopian Communications Authority announced that it had received expressions of interest from scores of firms, including telcos and non-telecom operators by June 22.
They include Vodafone, Vodacom and Safaricom through their investment vehicle Global Partnership for Ethiopia.
Others are Etisalat, Axian, MTN, Orange, Saudi Telecom Company, Telkom SA, Liquid Telecom and Snail Mobile, Kandu Global Communications and Electromecha International Projects.
Mr Joosub said the capital expenditure for the potential Ethiopian entry is not yet clear, adding that the auction of the licences is expected in February or March next year.
He added that while Vodacom was limiting its exposure in the consortium to five per cent, the multinational could raise its ownership after a couple of years into the operation.
Safaricom was allowed to lead the consortium for several reasons, including Kenya’s geographical proximity to Ethiopia.
“I think it will be a very good exposure to Safaricom from the perspective of geographical closeness on the one perspective, but also giving Safaricom additional exposure to more growth areas,” Mr Joosub said.
Besides selling the new telecommunications licences, the Ethiopian government is also disposing of a minority stake in Ethio Telecom, which has a monopoly in that market.
The transactions are part of economic liberalisation policies being implemented by Ethiopia, which is seen as presenting major growth opportunities in the telecoms market.
“Mobile phone use and ownership is significantly behind that of Egypt, Kenya and even Sudan, which is amplified when examining the uptake of mobile broadband services,” said the World Bank, which is advising Ethiopia on the telecom transactions.
Mobile phone penetration rate in Ethiopia, for instance, stood at 44 per cent compared to Kenya’s 100.8 per cent in the first quarter of 2019.
Uptake of mobile broadband (3G) was 8.8 per cent against 28 per cent while that of 4G stood at 0.17 per cent compared to Kenya’s 11 per cent. Mr Ndegwa said the Ethiopian government had indicated that winning bidders could be allowed to add mobile money to their services after a few years.
“Potential investors in Ethio Telecom are likely also to be potentially interested in the award of two new licences, so announcing both opportunities to the market at the same time should help to achieve the best possible prices,” the World Bank said.
“The government also wants to avoid the potential risk of Ethio Telecom being ‘left behind’ by the market opening.”
EthioTel is fully owned by the government and maintains a monopoly over all telecommunications services including open-wire, microwave radio relay; radio communication in the HF, VHF, and UHF frequencies.
The company’s critical infrastructure assets include two domestic satellites, which provide the national trunk service and large long-distance fibre network organised in 13 rings and with around 22,000km of fibre for its service operations — fixed line, mobile, Internet, data, voice and other value-added services.