Business News

Until last week, the government was still clinging on to its shares in Safaricom Ltd, literally sitting on a jewel even as
Telkom was tottering towards insolvency

By A CORRESPONDENT
The EastAfrican

It has emerged that the Kenya government only consented to selling 9 per cent of the shares in mobile telephone company
Safaricom Ltd toVodafone of the UK, after realising that it was not going to be possible to raise the billions required to
resuscitate the ailing Telkom Kenya.

President Mwai Kibaki also announced that an additional 34 per cent stake held by Telkom in the most profitable company
in Kenya will be sold to the public in an initial public offering (IPO).

State-owned Telkom Kenya owns 60 per cent of Safaricom Ltd, with the British company owning the remaining 40 per
cent.

The government must raise a massive Ksh27 billion ($375 million) to modernize the ailing parastatal and finance
retrenchment of nearly 11,000 staff who must be sent home to reduce the expenses from a bloated workforce.

But it does not have this kind of money in hand, and does not have the financial flexibility to borrow it.

One of the largest corporate organisations in Kenya – with a workforce of 18,000 – Telkom is in deep distress, with losses
ranging from Ksh3 billion ($41.6 million) to Ksh5 billion ($69.4 million) per annum.

Indeed, Telkom Kenya’s only valuable asset at the moment is the 60 per cent stake in Safaricom.

Until last week, the government was still clinging on to its shares in Safaricom Ltd, literally sitting on a jewel even as
Telkom was tottering towards insolvency.

The government’s argument has all along been that no potential strategic investor will take an interest in Telkom if its
Safaricom shares are excluded from its balance sheet.

Thus, Kibaki’s announcement last week not only signalled a major change in strategic thinking on the part of the
government, but also showed that it had – at last – realised that there was more to gain in unlocking the value it owns in
Safaricom shares, than in holding onto the shares of a company that has not paid it a dividend since it was established more
than five years ago.

Indeed, at the rate at which Safaricom has been growing, and with reports that the company will this year be taking on a
huge syndicated loan from the local banking sector, the likelihood is that the government and Telkom will have to wait for
several more years before they can start receiving dividends from the company.

Still, success in either selling 9 per cent shares of Safaricom and floating another 34 per cent on the Nairobi Stock
Exchange will depend greatly on what Vodafone wants and its own strategic interests.

Under an existing shareholders agreement signed in 1999, the government cannot sell its shares of Safaricom Ltd without
the consent of Vodafone, which has pre-emptive rights over the shares.

In addition, the government will need Vodafone’s co-operation to deal with the charges that have been placed on the
company’s shares by creditors.

Indeed, Safaricom has borrowed heavily, using the shares as security, with the consequence that these shares may not be
available for sale until the debts are discharged.

In negotiating with the government, Vodafone will want major concessions, including renegotiation of the shareholders’
agreement to reflect its enhanced shareholding position.

It is noteworthy that Vodafone is on record as having sought to buy more of Telkom’s Safaricom shares, it intention being
to assume 51 per cent shareholding of the profitable company and to include it in its consolidated accounts.

In April last year, the British conglomerate wrote to the Ministry of Finance offering to purchase 11 per cent of shares in
Safaricom Ltd from Telkom at a price of $100 million.

The letter was addressed to the then Finance minister David Mwiraria.

The offer was accompanied by three proposals:

First, that Vodafone would waive its pre-emptive rights on Safaricom shares to support a listing of the company on the
Nairobi Stock Exchange.

Second, that it would consent to a new shareholders agreement to reflect the new ownership structure.

And, finally, that Vodafone would expect Telkom to use some of the proceeds to clear interconnect debts owed to
Safaricom.

Audit firm PKF Consulting, which had been appointed by the government to advise on the corporate restructuring of
Telkom, had recommended that the government only sell 9 per cent of Safaricom shares to Vodafone.

It said that, with Vodafone at 49 per cent, the government could then negotiate a shareholders agreement whereby
Vodafone and the government disposed of 12.5 per cent each to the public so that the public ended up with 25 per cent
shares of the company.

How much is Safaricom worth and can the government raise enough money for Telkom’s restructuring from selling 9 per
cent?

That remains an open-ended question. However, going by the $1 billion enterprise-value-price that Vodafone put on the
table in April last year, it is clear that it is possible for the government to get the money it needs – depending on how it
negotiates.

It is to be remembered that the $1 billion enterprise value set by Vodafone in April last year was essentially a negotiating
position to start proper haggling.

According to international conventions, prices of telecommunications companies are determined by the number of
subscriptions.

Under one such convention, one line is valued at $400. With Safaricom’s lines having increased to an estimated 3.8 million,
sale of even a small amount of Telkom shares in the company can earn the government billions of shillings.

According to a valuation by PKF Consulting, the value of Telkom’s 60 per cent shares in Safaricom is in the region of $471
million and $790 million, based on the financial statements and subscribers as at May 31 last year.

From a review of Safaricom’s financial statements for the four years upto March 2004, the following trends emerge:

First, revenues increased from Ksh1.6 billion ($22.2 million) in 2000 to Ksh18.8 billion ($261 million) in 2004.

Although the company had a high gearing ratio, it was attributable to syndicated term loans from local banks in 2002 and a
euro-denominated term loan in 2003. There has been a tremendous improvement in debt collections and the ability of the
company to offset its short-term maturing obligations, especially trade creditors.

Vodafone is one of the largest recent inward investors in Kenya, its first investment being the 40 per cent stake in
Safaricom.

Since that time, the business has grown phenomenally. Safaricom has attracted over Ksh11.5 billion ($159.7 million) in
private sector investment from both international and local investors, created over 15,000 direct and indirect
telecommunications jobs, and contributed more than Ksh25 billion ($347.2 million) in taxes as at 2004.