Foreigners to Pay More for Safaricom Shares in Kenya

Mergers, Acquisitions and Financial Results

Foreign investors wishing to buy into mobile phone operator Safaricom Ltd must be prepared to pay much more than the price local investors will pay for the same shares during the company's planned initial public offer.

Sources involved in putting together what is set to be the largest IPO ever in sub-Saharan Africa revealed to The EastAfrican that the decision was made because the government felt it would be inequitable to allow foreigners to benefit from the discounted price local investors will be paying for the shares.

But citizens of member states of the East African Community countries of Uganda Tanzania , Burundi and Rwanda will be treated as local investors, according the draft prospectus now before the Capital Markets Authority for final approval.

The advisers have proposed an allocation formula that divides the IPO into two: A local investors' tranche and an international tranche.

In turn, the local investors' tranche has been divided into four investor categories, namely employees of Safaricom; dealers of Safaricom; qualified institutional investors; and retail and corporate investors.

It is understood that the foreign investors' tranche will take between 20 and 35 per cent of the offer, depending on the valuation of the company.

In a departure from past practice, foreign investors will this time around buy the shares through a book building process managed by UK investment bank Morgan Stanley.

However, all licensed brokers and agents will be allowed to scout for foreign investors and place orders in the book as long as the orders are accompanied by a bank guarantee.

Consequently, the lead transaction adviser will determine the offer price for the international tranche, which, according to the proposal, will have to be higher than the price of the local tranche.

Morgan Stanley, the book runners, will determine the minimum application size in the international tranche.

Away from the limelight, debate has been raging in the local investment banking community over whether or not it makes sense to create a special investor category for foreigners.

Critics have argued that the local market is large enough to absorb Safaricom and that there is no need to make a large allocation for foreign investors.

The opposite view is that in view of the fact that the existing investors on the Nairobi Stock Exchange are likely to liquidate the shares they currently hold to purchase Safaricom - and considering the size of the issue, now estimated at between Ksh55 billion ($821 million) and Ksh70 billion ($1.04 billion) - the international tranche will be the one to provide liquidity and stability in the market, especially during the critical aftermath trading period.

Indeed, pundits are already predicting that the advent of Safaricom and the anticipated massive liquidation of existing shares for the cash to buy Safaricom is likely to precipitate an unprecedented bear run on the Nairobi Stock Exchange that could see the value of the market go down by as much as 80 per cent.

The case for the international tranche is also being supported on the grounds of macroeconomic consequences, the argument being that the size of the Safaricom issue is likely to tighten the market and precipitate unpredictable movements in short-term interest rates, inflation and the exchange rate - hence the need for the participation of internationals.

The East African