After weeks of public debate over the fate of Kenya’s most profitable company, Treasury Cabinet Secretary John Mbadi has stepped forward to explain why the government is selling part of its Safaricom stake to Vodacom a deal he says is about safeguarding the future, not giving it away.
Mbadi stated that Kenyan Government will retain a material investment in Safaricom and reduce the risk of its shares getting diluted in the future by selling part of its share to Vodacom
He told the Joint Committee of the National Assembly handling the proposed sale the transaction would enable the Government to yield optimum value from an investment nurtured for more than 25 years.
“The key benefit that the Government of Kenya shall derive from the divestiture is to mitigate the risk of future dilution due to capital requirements by the business. Given the prevalent erosion of fiscal space, Companies that are controlled fully by Government might not be able to undertake investments even in the cases where there is proven certainty of payoffs or enhancing efficiency as the debt carrying capacity of the sovereign is diminishing,” said Mbadi.
The National Treasury was the first institution to meet the MPs on the Departmental Committee on Finance and National Planning jointly with the Select Committee on Public Debt and Privatisation, which is scrutinizing the transaction. The joint committee is set to meet interested parties as part of public participation on the transaction, which has already been approved by the Cabinet.
With Vodacom, which is 65 per cent owned by Vodafone, the Government is guaranteed hard cash, minimal disruption to the business, continuity in the success of Safaricom, and a long-term partner that can take higher and long-term risks Mbadi said
“This transaction eliminates any settlement risk, as Vodacom has a strong financial capacity and proven track record in completing similar investments,” he explained.
Vodacom has also proved to be a credible strategic partner in Kenya, which it entered in 1998 as Vodafone, and has stayed invested. Safaricom’s main competitor has over the last 25 years changed hands four times.
Mbadi said that the Government would maintain oversight of the strategic asset through its 20 per cent shareholding, with mature regulators – the Communications Authority, the Central Bank, the Office of the Data Protection Commissioner and the Competition Authority – ensuring accountability.
“This is one business area where commercial and regulatory functions are very distinct, hence shareholding is no longer a material Government tool of control,” Mbadi said.
The Government also negotiated safeguards: two seats on the Safaricom board, continuity in governance, retention of the name and brand, no acquisition-related redundancies within three years, ensuring the chairman, CEO and independent directors remain Kenyan and continued support of the Safaricom Foundation.
The Cabinet Secretary told the committee that the KSh34 per share was the best price and was settled on after assessments using various metrics. The Treasury’s advisors on the valuation were the Kenya Commercial Bank Investment Bank, which gave a valuation report detailing various valuation methodologies.
The factors considered include the value of net assets, earnings, dividends and discounted cash flows, with the fact that it is a listed company making it easier because its price was more readily determinable.
The average valuations based on: earnings was KSh26, price to earnings was KSh17, discounted cash flow was KSh18.51, discounted dividend model was KSh23.61, and the weighted average over six months was KSh27.50 per share. The average price given by leading investment banks was KSh30.82.
When the negotiations with Vodacom ended, the teams settled at KSh34, which will yield actual proceeds of KSh204.3 billion ($1.576 billion).
Kenya will also receive a dividend advance of KSh40 billion, in lieu of the KSh55 billion it would have received over the next six years.
The cabinet secretary argued that the KSh55 billion discounted at market rates is worth KSh29.3 billion, which means that the Government will receive KSh10 billion more than it would have from the market.
“Looking forward, if Kshs 40bn were invested at the market rate, it would grow to roughly Kshs 75bn in six years, meaning the proposed repayment of Kshs 55bn is Kshs 20bn lower than the fair future value. The transaction favours GOK both in present value and and future value view points,” Mbadi said.
The Cabinet Secretary also described the transaction as a key part of the Government’s plan to use non-tax revenue to deliver priority infrastructure development in energy, roads, aerospace, water and digital transformation.
“Our economy is in a critical turning point and to sustain the economic achievements realized thus far both from a macro and fiscal (inflation, interest rates, currency stabilization, GDP growth) perspectives we must turn to innovative financing mechanisms to fund infrastructure and public service projects,” said Mbadi.
