Nairobi Stock Exchange Caught in Crossfire of Telecoms Price Wars

Mergers, Acquisitions and Financial Results

Market capitalisation of the Nairobi Stock Exchange dipped last week on account of a decline in the Safaricom share price occasioned by the stiff competition in the telecoms sector.

The bourse shed Sh30.7 billion even as the Safaricom share price declined from Sh5.7 to trade at Sh4.70 on Thursday. "The decline in the equity market capitalisation can be attributed to competition in the mobile telephone industry that has triggered a decline in Safaricom share prices," reported the Central Bank of Kenya (CBK) in a statement.

The NSE 20 share index declined by 61.56 points to settle at 4,542 points in August 26 from 4,603.5 points on August 19th 2010. The NSE all share index lost by 2.69 points to settle 97.8 on Thursday from 100.49 the previous week.

Last week witnessed the most fierce price wars in the country, ignited by a move by Zain Kenya that reduced the calling tariff by 50 per cent. The decision saw Safaricom, which commands over 80 per cent of the market share, witness a loss of subscribers to Zain.

Safaricom responded with a temporary price cut to stem the mass migration as it contemplated the next strategy. It is, however, the sustainability of Safaricom's huge profits in the wake of lower calling tariffs that has elicited a decline in the firm's share price.

"The reduction in the share price has profound significance on the equity market, hence this is painting subdued performance on the bourse," said Johnson Nderi of Suntra Investment Bank.

The 20 per cent dip in the Safaricom share price saw increased share holder flight which buoyed the fixed income securities market.

This saw the bond market that had registered Sh32.3 billion in trade in the week before rise to Sh52.2 billion last week.

"The increase in bond turnover may be attributed to possible investor portfolio reallocation from the equity market," read the CBK weekly bulletin.

Following Zain's price cuts, the counter of the only listed telcom company witnessed massive activities raising the level of shares traded by over 350 per cent last week alone.

Given that almost 70 per cent of the firm's revenues accrue from voice calls, the market remains cynical that the firm can quickly diversify her revenue base using her huge capital base and maintain the huge profits that reached the peek of Sh20 billion in the first half of the year.

It remains to be seen if the reduction in calling tariffs will increase the frequency of calls, thus compensating telcom companies' loss of revenue due to a reduction in calling rates.

During the last quarter, the total number of mobile traffic grew by 19.9 per cent from 4.2 million minutes in the previous quarter to 5.1 million minutes.

This is an increase of 118.6 per cent compared to the same period the previous year.

Foreign players like JP Morgan, HSBC, and Alexander Forbes who control over 40 per cent of the stock market are waiting to see the strategy that Safaricom will adopt after the temporary reduction in price. Any move by foreign investors will have an immense bearing on the direction that the bourse will assume this week since they are major players on the Safaricom counter.