Mergers, Acquisitions and Financial Results

In a swift move aimed at winning buy-in from Kenya’s 2.5 million strong membership potential, Econet Wireless Kenya (EWK) last Thursday took advantage of a co-operative leaders forum in Nairobi to present a business case for a third mobile phone operator in Kenya.

Buoyed by last week’s dismissal of an appeal filed by the Kenya Telecommunication Investment Group (KTIG) with the Government’s Procurement and Appeals Board to annul the issuance of a third GSM licence to Econet, partners in the new GSM consortium appeared undeterred by the impending appeal in the High Court also filed by KTIG, an unsuccessful bidder that is seeking to have Communications Commission of Kenya (CCK) rescind its decision.

The bid for the third GSM operator in Kenya was won by Econet Wireless International of South Africa, acting in consortium with the Kenya National Federation of Co-operatives (KNFC) and other local investors. Last week, First Africa Capital put a strong business case to the Sacco leaders to invest in the company.

"It is important for co-operators to understand the workings of the local telecommunications sector and how it fits with the business case for EWK as a third mobile operator. That is what we were explaining to them," said Wanjiku Mugane, managing director, First Africa Capital, EWK’s lead financial adviser.

It is understood that immediately after winning the licence, co-operative leaders had tried selling the idea of buying shares in the company to the membership, but were unable in the absence of a prospectus to fully explain the implications, rationale and identity of the investment on their own.

Statistics show that there are about 10,000 co-operative societies with a membership totalling 2.5 million, controlling nearly Sh75 billion, both in savings and investments.

With the buy-in already obtained, it is therefore expected that the resource mobilisation process (which is, raising the requisite capital for licence fees, working capital and equipment rollout) is on course if the due process of law in court leaves the license in the hands of Econet.

Although Mugane could not be drawn into commenting on the share equity structure, it is expected that the same would be spread among Ushirika Communications, Econet Wireless International, Manga Mugwe’s Rapsel, Corporate Africa and institutional investors.

"The share structure will have to change. It would definitely be different from what has been reported in the media," said Mugane without elaborating.

The financial advisors said that a prospectus detailing the investment would be available to all subscribers in due course. They also revealed that Econet is in talks to register an over the counter market for shareholders to trade their shares.

Among the reasons given as the pointers to EWK’s successful entry include: intercontinental experience of the technical partner (EWI operates in Africa and UK); absence of legacy baggage (meaning, as a new company product differentiation is enhanced); the global fall in GSM equipment costs and new technology; the existence of a supportive regulatory environment that among other things, has the possibility of allowing the new Telco to share in Telkom or KPLC’s existing infrastructure and, the experience of late entrants in other markets and growth rate of Kenya’s mobile telephony market.

In addition, although growth in mobile telephony sector since 1998 has been phenomenal from just over 10,000 subscribers to over 1.5 million in March 2003, (equivalent to a 220 per cent compound annual growth rate), statistics from the CCK show that current demand stands at between 4.7 million and 9.4 million.

Industry analysts argue that the high levels of returns on investment by Safaricom and the growth in mobile subscribers achieved by the incumbent operators coupled with high projected demand, suggests that there is further room for investment in the mobile telephony sector in which even a third mobile operator will find attractive returns.

For instance, the un-audited results for Safaricom for the six months ending September 30, 2003 showed an operating margin of 30 per cent, which was unchanged from that for the six month period ended September 30, 2002, and a net profit margin of 17 per cent up from 11 per cent in September 30, 2002.

"This performance translates into an annualised return on equity (ROE) of 46 per cent, assuming that this performance is upheld up to March 31, 2004, said an ICT expert.

Mugane maintains that the argument for a third mobile operator is compelling, and is best answered by whether existing operators earn sufficiently high return on their capital to allow a new entrant to bring in more capital and earn a good return.

Financial Standard