Safaricom's Big IPO in Africa

The success of the Kenyan mobile service provider restores investor confidence in a country rocked by violence and political instability

The mobile-phone industry has shown it can thrive in countries beset by political turmoil, so why shouldn't a mobile industry initial public offering thrive?

On June 9, shares in Kenyan mobile service provider Safaricom will begin trading on the Nairobi Stock Exchange, in the biggest IPO ever in sub-Saharan Africa. The listing of 25% of the company owned by the Kenyan government—which is expected to raise $800 million and value Safaricom at $3.2 billion—seems remarkable considering the country only recently emerged from intertribal violence touched off by disputed presidential elections in December. More than 1,000 people died and 500,000 were displaced from their homes—and trading at the Nairobi Stock Exchange collapsed.

But Safaricom, in which Britain's Vodafone (VOD) indirectly holds a 40% stake, already has overcome tough circumstances to become one of Africa's most profitable and well-regarded companies. The share offering also seems to have been a hit. Some 750,000 Kenyans, who could buy shares for 8¢ apiece, applied for an allotment, sometimes lining up at banks to register. "Initially I didn't know so much about the shares, but I was able to consult with some colleagues and they said, 'An IPO is very good, don't be left out,'" says Thomas Bwire, 27, a part-time preschool teacher who hopes to make enough money to open his own school.

In fact, demand from domestic investors is so strong the government may exercise an option to increase the portion of Safaricom shares allocated to Kenyans beyond the current 65% of the total. That will leave a relatively small slice for foreign institutional investors, who are also keen to get in on the action. (Indeed, shares allotted to non-Kenyan investors are already six times oversubscribed.) Even after a 10% premium tacked on for foreign buyers, fund managers say the issue is priced right. And the size of the IPO means the stock will be easy to trade, in contrast to many other African issues where volumes are often thin.

Demand Affects Other Exchanges

"From a valuation point of view it's an attractive story," says Jens Schleuniger, a fund manager who follows African stocks for the DWS Investments unit of Deutsche Bank (DB). "It's going to be a very sizable company in African terms, with strong management and a dominant market position."

Demand has been so strong in Africa that trading volumes in some other exchanges in the region have plunged as investors set aside money to buy Safaricom shares. At the Uganda Securities Exchange in Kampala trading has fallen by half (, 5/30/08). "The tremendous demand for Safaricom, the amount of money that has been raised is mind-boggling in terms of the Kenyan market," says Mohammed Hassan, joint managing director at Dyer & Blair Investment Bank in Nairobi, which, along with Morgan Stanley (MS), is lead adviser for the issue. Morgan Stanley is also the global coordinator.

Safaricom, founded in 1997, is among the companies to have shown that mobile-phone service in emerging markets was not only possible, but profitable (, 8/27/07). But to succeed, it has had to innovate from the top down. To overcome lack of reliable power, for instance, Safaricom built base stations powered by diesel generators. To make service accessible to very poor people, it sells prepaid airtime on scratch cards for as little as 40¢.

And it has encouraged local entrepreneurs to offer shared "village phones" to people who can't afford their own handsets.

Room for Growth in Crowded Market

Other companies operating in sub-Saharan Africa have followed similar strategies. Among the regional success stories are South Africa's MTN (MTNJ.DE), Luxembourg-based Millicom (MICC), and Netherlands-based Celtel, now a unit of Kuwait's Zain (ZAIN.KW), which competes with Safaricom in Kenya. All got a boost from the introduction of low-cost handsets designed for emerging markets by Nokia (NOK) and other handset makers (BusinessWeek, 2/7/08).

Today, Safaricom commands more than 70% of the Kenyan mobile market. The company reported profit of $223 million in the fiscal year ended Mar. 31, a 15% increase compared with a year earlier, on sales of $987 million. Even though the market is getting more crowded, there is still room for growth. In addition to existing competition from Celtel, a third competitor, Zimbabwe's Econet, 49% owned by Essar Group of India, is preparing to launch service in Nairobi and Mombasa in coming months.

After all, only about a third of Kenyans have mobile-phone subscriptions, and the economy has grown 6% or better the last two years. Indeed, the economic growth partly reflects the benefits of bringing communications to a country that until a few years ago had virtually no phone network outside the major cities (, 9/13/07).

Still, prospects for the initial public offering looked shaky earlier this year. After Kenyan President Mwai Kibaki claimed victory in flawed elections, rioting broke out between his Kikuyu tribe and members of the Luo and other tribes who supported opposition candidate Raila Odinga. A measure of stability has returned after former U.N. Secretary General Kofi Annan negotiated a power-sharing deal, but the violence shook Kenya's image as one of the most stable African states.

The Benefits of a Vibrant Capital Market

Among ordinary Kenyans, the IPO got a boost when Odinga, now Prime Minister, urged people to buy Safaricom shares. Foreign investors are watching the political situation carefully, but it hasn't stopped them from putting up money. "People who invest in Africa are used to risk," says John Porter, Morgan Stanley's head of equity capital markets for the Middle East and Africa, based in Dubai.

In a way, the political turmoil demonstrated the resilience of the mobile-phone industry. There were some disruptions of service, but overall, traffic rose as people called to trade information or check on the well-being of loved ones. If the IPO continues to go smoothly, it will provide a strong signal that Kenya is back on track. "It has restored investor confidence in this country. The level of interest in Safaricom is simply amazing," says Humphrey Gathungu, investment manager at Stanbic Investments in Nairobi, a subsidiary of South Africa's Standard Bank Group (SBKJ.F).

The next test will be the performance of the shares once they begin trading June 9. A successful IPO could help pique international interest in African shares, which have already gotten a boost from successful bank IPOs recently in Nigeria, sub-Saharan Africa's most populous country. Angola is launching a stock exchange, and there is talk of telco privatizations in Ghana. Vibrant capital markets would do a lot to attract investment and allow Africa to share the growth that is transforming India and other developing regions.

The Kenyan economy will benefit directly if the government follows through on pledges to spend the IPO proceeds on rebuilding areas damaged in the violence and resettling displaced people. And ordinary Kenyans who have scrounged to buy shares could enjoy a windfall. Grace Murani, who earns $160 a month as director of a small orphanage in Nairobi's Kibera slum, used her savings to apply for shares worth $2,400. She is already dreaming of how she'll spend the earnings. "What I would like to do is build a house," she says.

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