At a recent briefing, Safaricom’s senior management were confident that the company would remain fundamentally attractive to investors as much as subscribers. Investments in technology and customer service will counter competitors’ efforts to drag Kenya’s largest operator into a price war. By Andrea Bohnstedt.
Les Baillie, Safaricom’s Chief Investor Relations Officer, typically hosts four to five international investor groups every month, which gives him confidence that the company continues to be attractive for investors. Baillie was keen to emphasise that there had been no a mass exodus of shareholders during Safaricom’s share price decline – to the contrary, the shareholder base had been stable throughout: From 842,611 in June 2008, the total number of shareholders dipped to its so far lowest level, 830,530, in October 2008, a reduction of a good 12,000 shareholders, or 1.45%. At the end of January 2009, this figure rose to 830,877 again. Some larger foreign investors exited in August 2008 to take their premium, Baillie explained, and another reduction in foreign corporate investment occurred between September and October when the global credit crisis began to bite. Feedback from interested investors is that the Safaricom share is undervalued, and remains an attractive target – but in the current economic environment, funds simply do not have the liquidity to invest.
Suzanne Kilolo-Kedenge, Safaricom’s Investor Relations Manager, added that the current share price development was not based on fundamentals, but mostly a reflection of the global financial crisis and very much in line with overall industry developments: In dollar terms, the Safaricom share has lost 53% between the IPO and March 2009 (41% in Kenya shilling terms), but she puts this in context with the Zain Kuweit share that has lost 56.25% in US dollar terms (52.9% in KWD).
That Safaricom’s market share has fallen from around 88% in September to 77% at the end of December 2008 was to be expected, stated Safaricom CEO Michael Joseph, given Zain’s aggressive (and costly) campaign to acquire new subscribers, and the entry of two new competitors during the year. But the decline in market share also has to be seen in the context of continued overall growth of the subscriber base, and the company continues to add subscribers at the same rate, with active subscribers numbering 13.3m by March2009. Many subscribers now have two or more connections from different operators.
Even though Kenya’s telecoms market has become steadily more competitive over the past year, Safaricom clearly stated that the company will be drawn into a price war. Especially newcomers Telkom Orange and Econet’s Yu are trying to lure subscribers with rock-bottom call charges, but Safaricom only reacted Zain’s across-network Vuka tariff of KES8 with the temporary, and now discontinued, Jibambie promotion. Joseph has made this point repeatedly before, questioning the long-term sustainability of such a strategy – an issue that has become an even more pressing point since Safaricom now has the interests of its shareholders to consider. Instead, he says, the company is investing in network quality, a new customer care centre due to open in April 2009, and a range of new products that will be launched shortly: roaming tariffs, a campus tariff, the 3G network to be rolled out across Kenya’s major town, and a new toll-free service.
A tentative recovery appears in sight as the Safaricom share price has risen by around 30% by mid-March from its low of KES2.50, half of the IPO price. Ricardo Couto from Nex Rubica does not see Safaricom’s prospects significantly threatened: “Our expectations for Safaricom are still positive in the medium to long term as their dominance in the market is being reinforced by investments in new technologies.”
James Addo, the CEO of Securities Africa Limited (SAL), is more cautious regarding the medium and longer-term outlook: “We feel that Safaricom is facing an assault on all fronts of its revenue model. Its overall market share will drop. Its fastest growing business, M-PESA, will be the focus of rival attacks: MTN's multi-country payment solution, Zain's system and so far two independent operators setting up in East Africa. Fibre will affect its data business, and margins will be tighter. Kenya's slowing economy will squeeze margins even further at a time when capital expenditures and marketing needs jump exponentially all this against a sharply lower share price further limiting flexibility in raising capital.”
MTN is also allegedly looking at acquiring Econet’s Yu in Kenya – the last entrant in Kenya’s market, struggling to gain traction, and who has neither the established position of Safaricom or Zain, nor the more comprehensive range of products and services that Telkom Orange can offer. This would confront Safaricom with another well-established pan-African telecoms player, and a competitor who is strong in neighbouring Uganda. MTN itself may be an acquisition target by China after the negotiations with India’s Reliance fell through.