Vodacom rings changes with Safaricom deal
• Acquisition provides mobile operator with access to an additional 29.5-million customers, writes Marylou Greig
In this strategic crossborder deal Vodacom acquired from Vodafone a 34.94% indirect interest in Safaricom, a market leader in Kenya with a 71% mobile customer market share, by acquiring 87.5% of the issue share capital of Vodafone Kenya.
The acquisition is the largest to date done by Vodacom in a share-swap deal valued at R34.6bn. The transaction constituted a related-party transaction for Vodafone and Vodacom.
Vodacom is majority owned by British-based Vodafone. It has grown its operations to include networks in Tanzania, the Democratic Republic of Congo, Mozambique, and Lesotho and provides business services to customers in more than 40 African countries such as Nigeria, Zambia, Angola, Kenya, Ghana, Ivory Coast and Cameroon. Vodafone sold down its stake in Safaricom as part of its drive to streamline its African businesses.
In recent years Vodacom, like other mobile network providers, has taken steps to expand more into financial services to improve revenue, as voice and SMS revenue continue to decline. The acquisition is a strong M-Pesa play, giving Vodacom an edge on Safaricom’s successful financial offering in East Africa and creating further incremental value through close co-operation, particularly in driving M-Pesa adoption across its operations.
For Safaricom, the deal allows it to expand into countries such as Nigeria and Angola, previously restricted by parent Vodafone’s agreement with the South African government to expand in Africa only under the Vodacom brand.
In Kenya, M-Pesa is an important driver of economic growth, providing essential financial services to more than 19-million customers. Vodacom closed its M-Pesa offering in SA in 2016 because of slow growth due to high banking penetration, the regulatory environment and challenges in distribution.
Safaricom has a solid business model and it is believed it could deliver better growth than Vodacom over the medium term. The deal makes Vodacom the dominant player in the region and provides it with access to an additional 29.5-million customers, offering the company better diversification and the opportunity to lift earning from outside SA to more than 30%. Its interest in Safaricom is expected to contribute 15% to group earnings.
While the transaction would undoubtedly have been more attractive if Vodacom had entered Safaricom a few years back, when the Kenyan telecoms market was undergoing price transformation and valuation may have been lower than the current deal levels, the highquality asset nonetheless fits perfectly with Vodacom’s current Africa portfolio.
Valuation-wise, the deal, at the time, appeared full and only at a marginal discount to the market but overall positive and value accretive in the long term.
The deal found favour with shareholders — providing access to a high growth, high margin and high cash generating business in the attractive Kenyan market with mobile penetration at only at 88%. In early June 2017, Vodacom secured the green light from 15.63% shareholder the Public Investment Corporation (PIC) to acquire the indirect interest in Safaricom. Shareholders approved the transaction in July.
The acquisition was funded by the issuing of 233.5-million new ordinary shares, raising Vodafone’s stake in Vodacom from 65% to 69.6%. At the time of the announcement, it was expected that Vodacom’s free float would decline to 18%.
As part of the Safaricom transaction, Vodafone committed to Vodacom that it would sell down a sufficient number of shares to ensure that Vodacom met the 20% minimum free float requirement on the JSE. In September Vodafone sold 90million (5.2%) Vodacom shares on the open market at an average of R165 per share (at a 7% discount) for R14.9bn.
Vodafone retains a 12.5% interest in Vodafone Kenya, equivalent to 5% in Safaricom. The Kenyan government owns a 35% stake in Safaricom and the remaining 25% is held by the public.
The key attractions of this deal are the earnings diversity that Safaricom brings to Vodacom shareholders and participation in the success of M-Pesa in Kenya. Vodacom has doubled its earnings base outside of SA and is becoming a more important role player on the continent rather than just the number one player in SA.
The deal gives Vodacom a single entry into sub-Saharan Africa. Vodafone is likely to sell its majority holding in Vodafone Ghana to Vodacom in the future while retaining ownership of the North African assets.
Advisers to the deal were Goldman Sachs, UBS, Deloitte, Nedbank CIB, ENSafrica, Webber Wentzel, Cliffe Dekker Hofmeyr and PwC.
It beat nominees Barclays’ divestment in Barclays Africa, the restructure of Distell’s multi-tiered ownership structure and the acquisition of Aldermore by FirstRand.