Safaricom, Vodacom deal clears the path for M-Pesa growth

Safaricom CEO Bob Collymore during the release of the company’s full-year results on May 10. photo | salaton njau
Safaricom CEO Bob Collymore during the release of the company’s full-year results on May 10. photo | salaton njau 

The African subsidiary of British multinational Vodafone is set to take over 35 per cent ownership of Safaricom in a share swap deal that could pave the way for a more rapid spread of M-Pesa across the continent.

Vodafone, which currently owns 40 per cent of Safaricom #ticker:SCOM, Monday announced it will cede majority of its stake in return for new ordinary shares in Vodacom for an estimated Sh266.6 billion (€2.4 billion).

People familiar with the transaction said the share swap will effectively bring to an end a clause that barred Safaricom from venturing outside Kenya.

ICT secretary Joe Mucheru disclosed that Safaricom, in which the Kenyan government controls a 35 per cent stake, could not before the transaction move into other African countries that would put it into direct competition with Vodacom.

While Safaricom will still not be free to enter Vodacom markets in Africa, it can now move to new countries where the South African firm does not have a presence.

Vodacom will in turn be free to use M-Pesa in its markets.

“At the board level if the company decides there is a market opportunity for Safaricom, say Ethiopia, we can go there,” said Mr Mucheru in an interview.

Vodafone currently offers M-Pesa services in 10 countries: Albania, the Democratic Republic of Congo (DRC), Egypt, Ghana, India, Kenya, Lesotho, Mozambique, Romania and Tanzania.

As of the end of December 2016, M-Pesa served almost 29.5 million active customers through a network of more than 287,400 agents.

The transaction announced Monday is supposed to simplify Vodafone’s operations in Africa, as opposed to the current situation where the two firms are practically sibling rivals.

“Vodacom Group sees scope to create further value through closer cooperation between both companies, including best practice sharing; replication of Safaricom’s success in M-Pesa in Vodacom Group’s other territories; and the creation of new pan-African enterprise solutions in contiguous markets in East Africa,” said Vodacom.

Vodacom will issue Vodafone with 226.8 million new ordinary shares in the transaction, raising the British firm’s stake in the South African telecom from 65 per cent to 70 per cent.

The transaction implied a nominal discount of Sh17.4 billion on Safaricom’s Friday average closing price of Sh20.25 per share.

As at Friday last week, Safaricom’s market capitalisation was Sh811.32 billion. The stake that Vodacom is seeking to acquire would then have had a market value of Sh284 billion, meaning that the firm got a discount of about six per cent.

However, based on a 30-day and 180-day average prices of Safaricom and Vodacom, the discount falls to 4.8 per cent and 0.6 per cent respectively.

Vodacom said it expects that Safaricom will contribute approximately 15 per cent of its earnings and that the deal will propel it to a leadership position in the telecoms market in sub-Saharan Africa.

Vodacom, which recorded a 1.5 per cent jump in revenue in the year to March 2017, is counting on M-Pesa revenues to fuel growth in its international operations.

Following the transaction, which is set to close in the third quarter of the year, Vodacom estimates that it will have 32 million financial service customers in East Africa, most of them in Kenya.

“The transaction provides a large level of diversification in a single transaction and Safaricom is highly complementary to Vodacom Group’s existing footprint,” said Vodacom.

Following a Sh48.4 billion profit in 2017 financial year, Safaricom is set to pay out Sh15.52 billion in dividends to Vodafone.

If Safaricom maintains its growth trajectory, Vodacom could swallow up similar or higher payouts in the future.

Vodacom’s coming to Kenya is bound to raise jitters of an overhaul at Safaricom. However, as part of assurances made to the government, Safaricom’s second-largest shareholder, brand identity and management will remain unchanged.

“There was a view that South Africans would come in and run this company. The plan is that Safaricom will continue to be predominantly run by Kenyans,” said Mr Mucheru.

Vodafone’s direct control of Safaricom has, however, been eroded as the British firm will now only have the right to nominate one board member while Vodacom will nominate three. Vodafone currently nominates four board members. 

Vodacom offers mobile services in five African countries, including Tanzania, the DRC and Mozambique. It also sells enterprise solutions in over 30 countries on the continent.

This transaction is part of ongoing efforts by Vodafone to consolidate its Africa operations. The British firm’s remaining stand-alone businesses on the continent are Ghana and Egypt. However, Vodafone told Financial Times that it has no plans to bring these units under the Vodacom umbrella.

“I see this transaction resembling what other multinationals operating in many African jurisdictions are doing, for instance Barclays,” said Standard Investment Bank analyst, Francis Mwangi.

Mr Mwangi reckons that the reorganisation will make it easier for Vodafone to develop broad, continent-level strategies for its business rather than having to focus on national units.

Vodacom’s non-executive directors have approved of the deal and the company has hired Deloitte & Touche to provide an opinion on the transaction, which will be circulated to shareholders in July.