Kenyans harvest billions from telecom investments

The money required to build networks, forge strategic alliances and market the services is forcing locals to relinquish ownership to deep pocketed foreigners.

“These are fairly large deals that require the muscle of larger players to push through. At the same time, the smaller Kenyan shareholders are looking for exit routes to allow them harvest their investments – it’s a good time to sell,” said Mr George Odo, the East Africa managing director of Africa Invest Capital Partners, a private equity firm.

Some local investors have taken advantage of these shifts to reap from their investment — thanks to their early entry into the lucrative sector.

Mr James Gachuhi, the chairman of Wananchi Group, tops the list of local businessmen who have ceded significant portions of their shareholding in local telecom firms – selling half of his shareholding in the company to an American private equity group early this week.

The biggest exit from the fast-moving and capital intensive industry have however been by businessman Naushad Merali, who has recently diluted his shareholding in Zain Kenya – the country’s second largest mobile phone service provider, Kenya Data Networks and Swift Global.

These deals are estimated to be worth billions of shillings. Mr Merali is estimated to have reaped about Sh49 billion from the latest Zain deal alone when he reduced his shareholding from 20 to five per cent in the last six months.

This return is based on Zain’s valuation in 2004 when a 60 per cent stake held by Vivendi was sold to Celtel at $250 million, which valued the entire company at $416 million ( Sh332 billion at the then exchange of Sh80 per dollar).

Also in the same league are Peter Kibiriti and Jos Konzolo, who had to cede their stakes in mobile service provider Essar after they failed to match the Indian telecom giant’s equity input.

“Major realignments in shareholding are under way in the ICT industry. Many telecoms companies are now foreign-owned following the recent inflow of new equity from international sources,” say analysts at Kestrel Capital.

Though some of the local shareholders are ceding ownership in telecom firms to harvest their investment, people familiar with the industry say inability to raise money in the current business environment is forcing some to unwillingly take the exit option – a move that may prompt a review of the telecoms sector policies.

“Capping ownership could be detrimental to the industry’s growth,” said Mr Charles Njoroge, the Director-General of the Communications Commission of Kenya (CCK). “In Mr Merali’s case I believe the amounts he was required to invest in Zain was simply too much and he asked that a special consideration be made as he could not match the requirements.”

Rapid growth in the industry has demanded that shareholders continue to invest large sums of money in their businesses. Inability to raise the required equity capital has weakened the grip of some local owners on their firms sparking buyer frenzy among international investors keen to capitalize on the lucrative telecoms market.

This has slowly left the telecoms sector in the hands of foreign investors with financial muscle and technical expertise to boost the operations.

Increased foreign presence in the telecoms sector is also being driven by the fact that many local shareholders have found it hard to raise the billions of shillings needed to set up the infrastructure that the businesses needs to grow.

These developments have in turn stretched the shareholding rules that the government put in place to protect local interests in the telecoms sector. The rules have particularly demanded that every telecoms firm maintain at least 20 per cent Kenyan shareholding.

Move forward
In recent weeks, there have been indications that the industry regulator may soon change the law and lower the cap to reflect the emerging changes.

Second placed mobile operator Zain Kenya last month released its half year results, revealing that Mr Merali had hived off part of his share in the company, leaving the Kuwaiti-based Zain Group with a 95 per cent shareholding in the company.

More recently, Indian-owned Essar Telecommunications announced that it had increased its stake in its local mobile operation, growing its share of the company to 70 per cent share up from 35 per cent.

“I would be happy if the government just scrapped the 20 per cent rule. We need to move forward with our investment but are sometimes held back by locals,” said Srinivasa Iyengar, CEO Essar Kenya.

Mr Iyengar said the Indian-owned Essar was two months ago forced to buy out Econet Wireless International, increasing its stake in the local operation to 70 per cent.

Essar now owns 80 per cent of the Kenyan telecoms following a dilution of the local shareholders stake because they failed to contribute their share of equity required to fund the company’s growth.

The losers were Econet’s Strive Masiyiwa – who had to let go of a seven year dream to own a Kenyan mobile operation – and locals Peter Kibiriti and Jos Konzolo, who now stand the risk of being edged out of the company should the government proceed with plans to scrap the 20 per cent rule.

“A new policy guideline would help reduce such incidents. Too many times local investors have held foreign investors at ransom with the 20 per cent requirement,” Bitange Ndemo Information PS said.

Essar’s move is the latest in a string of changes that have taken place in the last six months when big shifts have occurred in Kenya’s telecoms market.

Similar ownership scenarios are taking place in the internet services provision market, where an influx of South African investment has seen ownership structures of Kenya Data Networks, Swift Global, UUNET, IS Solutions and Africa Online head South.

Altech, Dimension Data and Telkom SA have bought into the previously Kenyan owned companies, increasing the influence of South African companies in the ICT sector.

Last year, Dimension Data acquired IS Solutions, a local ISP start-up, while Telkom SA took over Africa Online, which was originally Kenyan-owned.

Later this year, a similar deal that saw MTN, the continent’s biggest mobile company by numbers, acquire a 50 per cent stake in regional data carrier UUNET was completed.

The UUNET deal saw the exit of American data solutions provider Verizon Wireless. Telkom South Africa (Telkom SA) owns the other half of the company.

This week’s buying of a stake in Wananchi Group by an American private equity fund did not therefore come as a surprise.

Driving the foreign interest in local telecoms firms is the promise of increased revenues from a market that is among the world’s fastest growing.

Faced with a dismal economic outlook and substantial currency fluctuations in their home markets, most international investors hope to offset flat growth in established markets with double-digit growth in markets such as Kenya.

Pyramid Research reckons that the size of the Kenya’s telecom market is set to grow by 42 per cent from $1.3 billion (Sh104 billion) recorded in revenues last year to $1.9 billion (Sh152 billion) by 2013, with 78 per cent of the total coming from the mobile phone sector.

By June this year, Kenya had more than 17 million mobile subscribers, with a penetration rate of 39 per cent. Pyramid says that the subscriber base is expected to rise to 29 million in just five years, fueled by increased competition in the sector.

Analysts say the biggest growth in the coming months is expected to come from the data market. New international fibre optic links have seen companies scramble to earn a share of a market that is expected to triple in size. This will drive more shifts in the future shareholding composition of the market.

Consolidation in the local market has also seen local players with deep pockets emerge as a threat to smaller businesses.

These investors have the backing of solid financial leverage which they can use to acquire smaller players that add strategic value to their operations.

Examples include Safaricom’s recent acquisitions of One Communications and Packet Stream as well as Access Kenya’s purchases of Open View and Satori Solutions.

While most of the moves made by the more moneyed Kenyan companies have until now been driven by strategic interests, analysts said the situation could revert to Kenyans investing in the industry for more capitalistic reasons.

“In the future I believe we will see local investors with more financial muscle – such as the likes of Centum or TransCentury – start to make moves to invest in ICT companies to enjoy the opportunities in the field,” said Mr Odo.

Financial muscle is important as the sums required to get a share of the growing mobile and internet markets typically hover around the Sh10-15 billion mark.

For the local investor getting access to that kind of money can be difficult, as local banks are over-stretched and can only do so much especially when several companies seek such large amounts of money.

Analysts say credit is expensive in the international banking community as well as a result of the global financial crisis.

The situation has forced most private companies to turn inward and ask shareholders to inject cash (like Essar and Zain), while their listed counterparts - Safaricom and Access Kenya - have the option of pursuing an IPO or listing a bond.