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Stage is set for Orange shareholders to buy Safaricom

By Jevans Miyungu and Emmanuel Were | December 17th 2013

By Jevans Miyungu and Emmanuel Were

Kenya: The African telecoms landscape is staring at a major shakeup, with the recent revelation that US-based telecom giant AT&T is laying the groundwork for a possible takeover of Vodafone Group next year.

Vodafone owns 40 per cent of Safaricom.

Of interest to Kenya is that AT&T is only interested in acquiring the European operations of Vodafone, and not those in emerging markets.

Africa, Middle East and Asia-Pacific operations are currently grouped together under Vodafone’s emerging market operations.

The firm has a presence in Australia, India, Fiji, Kenya, New Zealand, Ghana, South Africa and Egypt.

In Africa — through a 65 per cent stake in Johannesburg Stock Exchange-listed Vodacom — Vodafone has operations in Tanzania, Mozambique, Lesotho and the Democratic Republic of Congo.

Beautiful assets

Vodacom and Safaricom are surely some of the “beautiful assets” Mr Vittorio Colao, Vodafone Group’s CEO, was referring to in Barcelona a few weeks ago at an investor briefing.

“We have a strategy and we are putting a lot of money into it, but if somebody comes and says, ‘You have really beautiful assets’, then I will agree,” Mr Colao said on November 20. “We have beautiful assets.” 

This means that Vodafone executives are open to suitors.

AT&T has hinted that all emerging market operations might be placed in one entity and sold to a single buyer.

“I believe these African telecom assets of Vodafone’s are set to experience parabolic and simply outrageous data growth, and hence, are very valuable. I am sure the innovative Mr Colao might segregate Vodafone’s Africa business in the event AT&T came calling,” said Nairobi-based investment analyst Aly Khan Satchu.

Mr Dobek Pater, an analyst at Africa Analysis, noted that AT&T would first need to obtain an “all clear” from the various competition commissions and regulatory authorities in the different jurisdictions to buy Vodafone.

“Let’s assume AT&T does acquire Vodafone and wants to dispose of its emerging market assets. Whether AT&T prefers to sell all emerging market assets to a single buyer or multiple buyers will be a function of a number of factors,” he said.

Africa Analysis tracks telecoms in the continent and has offices in South Africa, Nigeria and Kenya.

Administrative headaches

Price is a key factor — who is willing to pay how much for which assets and regulatory regimes in various markets.

For instance, if Orange wants to buy all of the Vodafone assets in Africa, would the Communications Commission of Kenya allow it to buy the Safaricom stake as well? If not, another buyer would need to be found.

Mr Pater cites AT&T’s readiness to deal with administrative headaches (more buyers means more bureaucracy) as another key factor.

Analysts privy to the goings-on in the telecoms industry in Africa suggest that Vodacom, which is heavily capitalised, could buy a majority stake in its own operation from Vodafone.

It could also buy Vodafone’s stake in Safaricom and in other African operations.

However, Vodacom could have a formidable competitor in Orange, which has expressed an interest in acquiring some of Vodafone’s African operations in South Africa and in Kenya, where it has a 70 per cent stake in Telkom Kenya.

Other potential buyers could be América Móvil and China Mobile.

Latin America’s largest telecom operator, América Móvil, would be an interested party in what is happening.

The world’s second-richest man, Mr Carlos Slim, owns a majority stake in the firm, and has consolidated his stake by acquiring telecom companies in Europe.

What would interest Mr Slim in Africa and Kenya is the opportunity for triple play services — phone, Internet and television. He has made his fortune in Latin America by dominating this sector.

Slim is very good at acquiring, especially when large companies like Vodafone are exiting. He is a telecoms man who shows optimism when others are pessimistic.

If Slim gets involved, he will provide a serious challenge to French telecoms giant, Orange.

The firm operates in 20 countries in Africa — including Kenya, Ivory Coast and Egypt — and the Middle East. It is the third-largest telecoms company on the continent, with more than 70 million subscribers.

Vodafone is the world’s second-largest telecom (after China Mobile), with approximately 92 million subscribers across its networks, which include Safaricom in Kenya, Vodacom in South Africa and Vodafone in Egypt.

What of MTN?

Orange, while announcing its third-quarter results last month, announced a year-on-year growth in customers in Africa and Middle East of 6.8 per cent, with strong regional growth led by Mali, Guinea and Ivory Coast.

But the Kenya operation — Telkom Kenya Ltd (TKL/Orange) — is reeling from losses.

Revenues from the region also grew for the company up 4.1 per cent, again led by Mali, Guinea, the Ivory Coast and Senegal.

MTN, Africa’s largest telecom operator, has also expressed interest in buying Safaricom or some of Orange’s operations.

“The potential entry of MTN surely recalibrates the telecoms industry in Kenya,” said Mr Satchu.

MTN, based in Johannesburg, is the second-biggest provider of mobile phone services to South Africans, after Vodacom Group. However, it has more customers in total than Vodacom.

This essentially means that three telecoms giants — MTN, Orange and Vodacom — could be interested in Safaricom, the jewel in Kenya’s telecom market.

Whether this will ever happen, only time will tell. The firms refused to comment on industry speculation.

Safaricom, which is 40 per cent owned by Britain’s Vodafone, is the most profitable mobile operator in Kenya. It reported a 38.2 per cent rise in profit before tax to Sh15.9 billion for the six-month period to September.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) rose 29.4 per cent to Sh28.85 billion, it said, adding that messaging and mobile data revenues both rose more than 40 per cent, while earnings from its M-Pesa mobile money system climbed 20 per cent.

If AT&T’s bid sails through, it would create the largest mobile operator globally, with joint annual sales hitting $250 billion (Sh21.6 trillion — cash that could pay our government’s bills for 13 years).

However, no deal can be struck until Vodafone completes the sale of its stake in America’s Verizon Wireless, which will see it pocket $130 billion (Sh11.2 trillion).

Orange has to date been viewed as having the most interest in Vodafone assets in Africa. 

“This would be a good fit for Orange, especially since it has mobile and fixed line operations, and it has been trying to establish itself in South Africa for a while now,” Pater said.

South Africa is one of the key markets in Africa for an operator that wants to be a truly pan-African operator.

DR Congo and Kenya are the two markets where both Orange and Vodafone have operations.

Kenya presents an interesting scenario, since Vodafone holds a 40 per cent stake in Safaricom, which means the transaction would still need to be approved by CCK and other minority investors.

“Alternatively, the minorities could decide to buy out the Vodafone interest and go it alone,” Pater said.

He added that if Orange did want to buy the Vodafone stake in Safaricom, it would probably first have to sell its TKL/Orange operations. This would be a complicated process, as Orange would want to have guarantees in place that it could purchase the stake in Safaricom before disposing of TKL/Orange.

Buy out minorities

“I suspect Orange would prefer to buy out most of the other minorities in Safaricom so that it could rebrand the company to Orange and have management control.”

If Orange buys Vodafone assets in Africa, the continent would have two truly large pan-African operators — MTN and Orange — with Airtel a distant third (especially in terms of revenue).

It could also precipitate more consolidation in African markets as competing operators try to build economies of scale across markets to become more competitive.

It could also mean a stronger push towards fixed/mobile convergence on the continent, as Orange would focus on it, forcing MTN to step up its fixed line activities (MTN Enterprise) to stay in the game.

But if MTN bought TKL/Orange in Kenya, Pater says this would provide MTN with a strategic piece of the puzzle in its pan-African geography — mobile operations in Kenya.

However, the mobile operations of TKL/Orange are small and Safaricom will remain a very formidable market player.

MTN has been very successful in building mobile operations in various Middle East and Africa (MEA) markets, but the Kenyan market presents a unique challenge due to Safaricom’s dominant position.

Fixed line operations could see more growth in Kenya, but to a large degree, this would be on the back of greater demand for these services, especially in the enterprise market.

Mr Bill Hearmon, the chairman of the African Broadband Forum, thinks MTN can buy Telkom Kenya assets, but the discussions would involve a lot of horse trading since the Kenyan telecom has accumulated losses.

“MTN would be interested, but the goverment and France Telkom would have to sweeten the deal. MTN would not want to buy the company with the debt,” said Mr Hearmon.

One of the few positives for Vodafone over the past few years has been the performance of its African subsidiaries — Safaricom in Kenya and Vodacom in Southern African and the surrounding region.

“It would make no sense whatsoever for AT&T to buy Vodafone, yet allow someone else to buy the African operators,” said Mr Peter Wanyonyi, a telecoms analyst currently based in the United Arab Emirates.

In July, Vodafone announced a 3.5 per cent reduction in revenues across the group, with the only positives being the continuing growth of revenues for Safaricom and Vodacom. Its revenues grew over 21.7 per cent in Ghana, for example, while Vodacom grew its revenues 3.2 per cent.

“If AT&T really did go ahead and allow bidding for Safaricom and the rest of Vodafone’s interests in Africa, the most likely scenario would be for Vodacom — which has a sizeable cash pile — to buy out the Vodafone shares in the African operations,” Mr Wanyonyi said.

Eat my lunch?

“Orange is a competitor to Vodacom, and it is unlikely that the latter would sit by and watch Orange step in and eat its lunch.”

And with TKL having performed below expectations: “It appears a consolidation of some sort is inevitable. It has made losses, has got into scrapes with the government over cash, and appears hard up and unable to muster investment capital,” Wanyonyi added.

With this in mind, Wanyonyi said a bid from MTN would be welcome, and it has more experience dealing with these kinds of markets than Orange.

“The entry of a cash-rich, Africa-experienced-and-controlled player like MTN would be good for the Kenyan and East African market. There has been no significant competition for Safaricom in Kenya, which has been bad for innovation and consumer prices,” he said.

Additionally, pressure is beginning to build for the elimination of roaming charges within the East African Community, and a cross-border operator like MTN would have more to offer to certain segments of consumers than is the case currently.

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