Safaricom IPO shows value of mobile businesses in emerging markets

Thursday, 24 April 2008 15:31  |  Alec Barton

Safaricom is jointly owned by Vodafone, which holds 40%, and the Kenyan government with 60%. The government, which is selling 40% of its holding, planned to raise over US$735 million. It now looks like it will get considerably more for its shares.

Safaricom is Kenya's leading mobile operator with an estimated market share of 73% at the end of 2007. It claims to have the broadest network coverage and the most robust technology. Safaricom is also the most profitable company in East Africa with a pre-tax profit of US$278 million in 2007.

The level of interest in the IPO demonstrates the appetite of African investors to own major assets in their country and region. It also shows a strong African belief in the value of the mobile phone sector as a place to invest in for long term growth. Interest in the IPO was particularly high from small investors, with long queues forming at IPO centres as investors rushed to beat the deadline.

Over subscription by local investors will mean that the number of shares set aside for international investors will fall from 35% to 20% of the total. It also means that the more than two million local investors who applied for shares may end up with fewer shares than they applied for.

What effect this will have on the running of the business is not yet clear. But a strengthened local shareholder base and a strong market in the shares, with greater access to capital to fund future growth, will surely give the company greater confidence to expand. It may need this as competition is increasing both from local operators and pan regional networks.

The success of the Safaricom IPO may encourage other governments in emerging markets to consider similar moves towards cash raising. Like Kenya, many other governments in emerging markets are in need of cash. There are a significant number of similar network operators to Safaricom and governments may increasingly look to unlock the value of their assets. And as the level of deregulation and competition increases it may become irresistible to governments to lock in some of the gain.

And what of the impact on Vodafone? The dilution effectively hands Vodafone control - the Kenyan government is retaining only a 35% shareholding. Things may not be that straightforward, however, as it is not clear what will happen once the shares are publicly traded. It is quite possible that a significant number of small shareholders may decide to cash in their winnings and take profits in the short term.

It is believed that the agreement with the government permits Vodafone to increase its stake by further share purchases only six months after shares commence trading on the open market. This will leave the way is clear for other wealthy individuals or businesses to build stakes before Vodafone can step in to the market itself. New shareholders may be aligned with the government, other local or overseas interests and could put a brake on Vodafone's freedom as well as increase the price it will have to pay to get full control if that is its ultimate aim.

But it is in no one's interest to kill the goose laying the golden egg. Is this a model for future mobile operator IPOs - you bet.

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