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Kenyan mobile IPO may mark market’s zenith

The stage has been set for east Africa’s biggest – and most hyped – initial public offering, with record-breaking profits, a share sale almost five-times subscribed and the cheerleading of Kenyan politicians.

Safaricom, a Kenyan mobile phone operator part-owned by Vodafone, begins trading on the Nairobi stock exchange on Monday following the government’s sale of a 25 per cent stake in the group.

In spite of the euphoria surrounding the company, which dominates Kenya’s two-player market and has been valued at KSh200bn ($3.2bn, £1.6bn, €2bn), the IPO may mark its high point.

While global operators, such as Vodafone, are looking to Africa to offset slowing growth in core businesses, some African companies have grown beyond the era of rapid expansion and super-normal returns.

Since Vodafone took control of 40 per cent of the company in 2000, it has had a blistering run of success, securing more than 10m subscribers and a market share of more than 80 per cent in a country where one-third of people own a mobile.

But Safaricom is entering a tougher phase as the Kenyans who have yet to enter the market are the poorest people with the least disposable income. What’s more, two new competitors – and a revived Celtel, the country’s second operator – will be competing for both them and for Safaricom’s customers.

One emerging markets hedge fund manager in London says: “The company is in the later stages of growth and therefore mature relative to other African assets. Its market share is also likely to start declining.”

Mobile phone penetration in Kenya, he adds, is higher than in most markets outside South Africa where MTN – the pan-African group in talks with Reliance Communications of India about a merger – operates.

Michael Joseph, Safaricom’s chief executive, says: “As you go down the economic ladder, the people you can bring on to your service spend less even though your capital outlay is the same, so for sure average revenue per user will reduce.”

But even as monthly revenue per user fell to KSh616 from KSh799 in the year to March, Safaricom’s pre-tax profit climbed to a Kenyan record of KSh20bn from KSh17bn. Mr Joseph adds: “Investors wouldn’t buy into this company if they thought it was the end.”

The international pool of the Safaricom offering was heavily oversubscribed – more so than the Kenyan retail segment – with 90 investors applying for a total of 14.2bn shares against the 3.5bn on offer. When trading begins on Monday, international fund managers will own 20 per cent of the company.

Mr Joseph has acknowledged the possibility of Safaricom looking for new growth in younger markets outside Kenya. But its options may narrow if Vodafone succeeds in raising its 50 per cent stake in Vodacom into a controlling stake, a move designed to make the South African company its expansion vehicle in Africa.

“Safaricom has a great management team, but they are only seconded from Vodafone: they will do Vodafone’s bidding,” says the hedge fund manager. “This is what takes away the prospect of blue sky growth.”

Safaricom posted an operating margin of 30 per cent for the year to March, but analysts agree that will fall as competition increases.

Econet Wireless, which is part-owned by Essar Communications of India, is to roll out a mobile service and, while Econet is tight-lipped, analysts speculate it may introduce an “Indian model” based on ultra-low prices and high call volumes.

France Telecom, which last year paid $390m for a 51 per cent stake in Kenya’s former state telecoms monopoly, is due to roll out its service – its 14th in Africa – under the Orange brand by September.

Celtel is majority-owned by the Zain Group of Kuwait; its lossmaking Kenyan subsidiary has been one of the worst performers in its 15-country African portfolio. Analysts attribute its decline in part to the innovativeness of Safaricom.

To turn the operation around, Celtel has installed new management; Bashar Arafeh, its chief executive in east Africa, says Celtel plans to invest more than $5bn in the region over the next five years. It has cut daytime call rates to KSh3 a minute.

“We promise to be Safaricom’s worst nightmare,” he adds.

Источник: Financial Times

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