In this article
Safaricom IPO
On March 28, 2008, barely months after the post-election violence and at a time when Kenya was going through peace and reconciliation, the best son of the NSE for the next ten years was born.
President Mwai Kibaki launched the Safaricom Initial Public Offering and placed a personal application for One Million shares worth Sh 5M.
Despite cries by the opposition that the government was selling its best company, the government of Kenya went on to sell 10B ordinary shares of Safaricom at a par value of 5 cents(Ksh 0.05). This comprised 25% of the issued ordinary Safaricom shares after dilution to make them accessible to as many shareholders as possible.
The Monopoly Safaricom Has Been
At that time, Safaricom had 9.2M subscribers and 700,000 M-Pesa users. Fourteen years later, Safaricom has grown to be the biggest company in the Nairobi Securities Exchange by Market Capitalization, with a market cap of Sh1.2 Trillion as I write this, trading at Sh 31.15 and accounting for more than 36% of the NSE market cap.
In Financial Year 2022, Safaricom Plc had a net income of Sh 69.6B.
Mpesa has continued to be their most profitable business accounting for around 40% of their income in FY2022.
Mpesa, which celebrated 15 years of existence this year, crossed the 30 Million customer mark and 492K Lipa na Mpesa Merchants.
The success of Mpesa has surprised many, including the outgoing Safaricom Chairman, Michael Joseph, who considers himself the mother of Mpesa.
In an interview with KTN, he said,
“I didn’t come up with the idea, but I brought it to life. I consider myself the mother of Mpesa. We didn’t know it could do this much when we brought it to life. The intention was to change peoples’ lives for the better.
But to imagine to this extent that we have, no. Nobody could have predicted success in terms of changing people’s lives. It has also changed my life just like it has made the lives of so many other people so much easier.”
Besides Mpesa, Safaricom continues to dominate the local market with 64.3% of the Mobile data Customers, 70.4% of Voice Traffic, 37% of Fixed Data Customers, and 42Million Total Subscribers.
The dominance of Safaricom has led to a proposed plan to split Mpesa from the Telco business.
Plans To Split Mpesa From Safaricom
Central Bank of Kenya
Last year, the CBK and Safaricom could not agree on the importance of the split. As reported by The Standard Newspaper,
“CBK is banking on the strategy to cut friction between customers and digital payments providers, boost interoperability between payment platforms, introduce transparency in pricing and stricter corporate governance as well as customer protection safeguards.
CBK said both Airtel Kenya and Telkom Kenya have discussed separating their fintech businesses from their core GSM (Global System for Mobile Communication) function and are in the process of effecting the plan.”
On his end Dr. Njoroge, CBK governor, had this to say,
“For Safaricom, we’ve been in discussions with them, and they too understand the reasonableness for this. At this moment, all the mobile and GSM work is inside the green in the middle, and that is what we want to be separated from.
They(Safaricom) will create the equivalent of another subsidiary, the mobile entity, and the GSM voice and data can remain within Safaricom or separated. “
Parliament
In 2021, Gem MP Elisha Odhiambo proposed the Kenya Information and Communications (Amendment) Bill to address concerns that Safaricom had become too big through its dominant market share in voice, mobile data, and mobile money.
However, only two of the 349 members showed interest in debating the bill’s contents.
If the bill were to pass, mobile phone companies would be required to separate entities to manage any other business they engage in outside telecommunication services. They will be licensed only to offer voice, data, and SMS services, while mobile money services will be licensed as banks.
Michael Joseph on Splitting
In an interview with KTN in April this year, when asked about the proposed plans to split Mpesa from its parent company Safaricom, outgoing Chairman had this to say,
“First, it’s an idea that we are looking on what to do. Of course, Mpesa is so big. It’s 45% of our revenue, and it could be better to separate it from a regulator’s point of view so that the Central bank can regulate Mpesa, not regulate Safaricom. That makes sense from that point of view.
It also makes sense if you say we wanted to do more with Mpesa. It is limited when you are within the Safaricom family, but when the Central Bank regulates you, you can apply to do more things with Mpesa. The intention is not to separate it as people have speculated. To separate Mpesa, put it into a separate company, and then sell shares in Mpesa. Of course, that would be fantastic, but that’s not the intended purpose.
If you took Mpesa from Safaricom and CBK regulated it, you could then apply to CBK to have Mpesa offer more services to its customers, which are not necessarily telco services.
I think what we would do is create a separate company called Mpesa Safaricom and split it from Safaricom so that it’s an independent subsidiary of Safaricom. It would have its board of directors, its Chairman, and its staff.”
The CEO On Splitting
In an interview with Hisa Founder, Erick Asuma, Safaricom CEO, Peter Ndegwa when asked about the possibility of separating the fintech business from the telco business said,
“For us, we believe that the connection between Safaricom and M-Pesa is very significant. You can’t operate the fintech without a GSM business.”
Expansion To Ethiopia
The Expansion to Ethiopia has been welcome to new to most long-term shareholders. This is because Ethiopia is one of the largest countries in Africa, with a population of 112M people. Moreover, it is also one of the fastest growing economies in the world, with an average of 7% GDP growth over the last seven years. It is one of the last countries in the world to liberalize its telecom industry.
Safaricom Ethiopia is expected to reach EBITDA break-even in four years and an EBITDA margin of 40 per cent in 10 years, as Vodacom reported in their annual report.
The Ethiopian business reported a Sh 4.8B loss in the ten months ended March 2022
Hefty Transaction Costs
If there is one thing that Mpesa customers complain a lot about and are even forcing them to seek alternative methods of transacting, it has to be the Mpesa charges.
In an interview with KTN, when Michael Joseph was asked if they had any plans to lower the transaction costs due to the ongoing outcry by their customers, he said,
“I don’t think there has been an outcry. But I do believe that our pricing can be reviewed and looked at again. I do think and have been an advocate for this for a very long, long time that we have transactions below a certain amount free of charge. And they are still free of charge. Below a hundred shillings is free of charge.
But I think prices should be put down. We shouldn’t be regulated to put prices down. We should do it because we think it’s the right thing to do.
Reduced MTR
If there’s one considerable risk that Safaricom faces, it has to be regulatory risks.
Safaricom now stands to lose an estimated Sh 1.5B annually after it reached an agreement with the Communications Authority of Kenya to cut Mobile Termination Rates (MTR) from the current Sh 0.99 per minute to sh 0.58 per minute.
Safaricom’s earnings from the charges were to fall by a much steeper margin based on the earlier move by CA to cut MTR to sh 0.12 per minute effective at the beginning of this year.
CBDC By Central Bank
The proposed Central Bank of Kenya digital shilling is seen as a competitor to mobile money down the road, especially in its ability to lower transaction costs.
This has, however, proven to be a significant challenge as the use of CBDC requires the use of smartphones, with data showing that 56% of the phones in the country aren’t smartphones and would hence be difficult for most people to transact using CBDC.
Michael Joseph, when asked if CBDC would be a threat to Mpesa, said,
“No. The way the world is going, these digital currencies are going to emerge. There are, to some extent, digital currencies everywhere. I don’t see this as a good or bad thing for us. I think it’s just one of those things that’s going to happen.
Whether it’s going to be successful depends on whether people will embrace it or not. Some people would buy digital currencies, and others would not. And to some extent, Mpesa is a digital currency except that it is backed by cash.
I don’t see it like a threat. Just like what people said when PayPal came out, Google pay came out; Facebook pay came out. All of these things. Neither of them has been a threat to us.”
No Company is Too Big to Fail
In 2018, Jeff Bezos, when asked by an employee about the future of Amazon,
he admitted that Amazon was not too big to fail. In his own words,
“Amazon is not too big to fail. In fact, I Predict that one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30 plus years, not a hundred plus years.”
Safaricom has been the greatest thing to have happened in the NSE for the last decade. It has been the biggest gainer having IPOed at Sh 5 per share in 2008 to hit all time highs of 43.70 in August 2021.
Whether Safaricom will remain to be the NSE giant or not is a matter of time to tell. Is it too late to jump onto the Safaricom boat, or is it too early to miss out on the best years of Safaricom ahead?
