Category Archives: Kenya privatization

Hilton, Intercontinental, KWAL Privatizations

Privatizations to be concluded by the Kenya Government by June 2013 include: 

  • The Industrial & Development Corporation (ICDC) will sell 26% of Kenya Wine Agencies Limited (KWAL) to Distell of South Africa and 4% to employees.
  • The Kenya Tourist Development Corporation (KTDC) will sell 40% of the 287-room Hilton Hotel, 34% of 389-room Intercontinental Hotel (both in Nairobi) and 39% of Mountain Lodge which is located in Nyeri and managed by TPS Serena, to fellow shareholders.
No IPO’s will result, but the remaining shares in KWAL may be sold to the public within two to four years if their performance improves.  

Reading the Safaricom Tea Leaves

Post two of three: Safaricom has been one of the most progressive companies in terms of investor relation’s management, largely because of the cost of their large shareholder base. They spearheaded move to avail electronic instead of printed annual reports and payment of dividend by m-pesa, as opposed to cheques which were unviable for many shareholder who had the bare minimum of shares. Another benefit of electronic reports is that they are easier for potential investors to obtain (some companies print as few reports as legally possible and they don’t circulate widely)

Inside Safaricom’s 2010 A/R

Shareholders: – Safaricom has 787,363 shareholders down from 828,912 in 2009
– The Government of Kenya has acquired more shares in the company despite a stated move of divestment. This year they have 22 million more shares, going up from 35% to a 35.06% stake
– Overall there are more foreign buyers of Safaricom shares, but NSSF Rwanda may have exited
– Director Esther Koimett bought 517,600 shares, and chairman Nicholas Nganga has 850,100. Outgoing CEO Michael Joseph and Finance Manager Les Baille each own 2.5 million shares, while their replacements, Bob Collymore and Chris Tiffin have none
– Last years’ AGM (the first since NSE listing and prominently advertised as having no handouts or frills) was attended by just 2,182 shareholders.
– 180,000 shareholders got their 2009 dividend by m-pesa (mobile phone payment)

Performance – Revenue breakdown of the 83 billion ($1 billion) in revenue voice accounted for 75% (2009: 83.4%), with SMS and other data at 9.7% (2009: 8.8%), Mpesa at 9.0% (2009: 4.2%) and equipment sales at 4.4% (2009: 3.3%). Revenue growth was 8% for voice, 32% for SMS/Data and 158% for Mpesa n all categories was positive with voice at 7.8%, SMS and other data at 32.4%, 58% for equipment sales and 158% for Mpesa
– North Eastern Kenya region is growing by over 200% owing to improved security

Other Numbers – Earned Kshs 7.6 billion ($95 million) from m-pesa (up from 2.9 billion in 2009)
– Has Kshs 10 billion ($125 million) in cash and short-term deposits, up from 4 billion the year before. Safaricom earned interest income of Kshs 350 million in the year
– Borrowings comprise 6.28 billion from a consortium of banks, 2.3 billion from one bank, and 7.5 billion in corporate bonds
– Have 2,000 dealers and 200,000 retailers
– Pay income tax at 27%, compared to 30% before they listed at the NSE

Staff – Launch ESOP in 2009 with 101 million shares and which will be issued in 2013. 2165 staff (88% of total) have joined the scheme
– Key management were paid 522 million (up from 438m)
– Of their 2,470 staff the company has an almost equal ratio of male and female employees

Fibre/Data Investments: – are investing 890 million into Seacom: they paid 316 million and balance of 573 million is to be paid over the next 5 years
– Paid 2 million to TEAMS for a 22.5% stake (other shareholders are GoK and Telkom both with 20%)
– Paid KPLC Kshs 116 million as part of 290 million for use their power network for fibre distribution over the next 20 years
– Bought packet stream data networks, for wimax,for Kshs 373 million shillings, and has lent Kshs 600 million to One communication (in which they own 51%)

Customers – their internal customer delight index had a measure of 7.38 last year against a target of 7.76
– Its true that premium customers get better customer service – there is a platinum line at call centre to service platinum (high end) customers on a prioritized basis (i.e. even by calling regular customer service free help line, ‘100’ they get through and served faster
– Safaricom business has over 2,000 customers including airlines, media houses, banks
– Mobile data is responsible for 90% of data revenue
– customer growth (their measure) Safaricom took up 65% of new phone lines in last year
– website: Safaricom the most progressive companies in online investor relations in terms of results and investor briefing posted on the web site and now dividend payments by mobile phone. It now uses twitter & facebook accounts, to promote its services and also try and (slowly) responsd to numerous customer service and product queries posted online

Rival disclosures: Safaricom’s main rival is Zain Kenya – and while it is not a listed company, the former Zain parent was listed on the Kuwait Exchange, and used to produce some extensive reports on their African operations – ranking individual countries by revenue, profit, subscribers – which was information that the local Zain office did not typically share. Similar information can also be gleaned from Orange of France about their Telkom Kenya operation.

Zain Africa sold to Bharti Airtel of India and while a financial quarter is yet to pass since the takeover, it appears they may follow the trend, as they are also a listed company with segmented reporting requirements. For Kenya in July 2010, they note that:

– Airtel Kenya has been given additional frequencies that enable it to offer 3G services
– All operators will have the right to borrow funds from the universal service fund (a fund that will comprise 1% of mobile operators annual turnover) and to use to set up infrastructure in the identified rural areas.
– Kenya companies are Bharti Airtel Kenya B.V. (name changed from Celtel Kenya BV), and Bharti Airtel Kenya Holdings B.V. (name changed from Celtel Kenya Holdings BV)

Orange Kenya Outlook

Ever since the East African broke the story about France Telecom asking the Kenya Government (GoK) to reimburse it for more than the amount it paid to invest in the privatization of Telkom Kenya in 2008, its been an interesting tale – (summarized well here at Ratio Magazine) – and also confusing that a company invested in the mobile business – a component of one of Kenya’s fastest-growing sectors (communications) until recently, could be struggling. Orange is also the exclusive partner apple for the i-phone in Kenya which is the world’s leading smartphone.

Market leader Safaricom is part of the problem as Orange, Zain and Yu have been unable to shake its dominance of the market whether voice, data, dealerships, money transfer.

That Orange expects more support from GoK as a shareholder is evident since they still own a majority (51%) of Telkom Kenya, compared to the 35% GoK owns in Safaricom. E.g. Orange, Zain and Yu have been lobbying hard for the lowering of the cost of a 3G license from the current $25 million which only Safaricom has paid (Kahenya wants proof that 3G was paid).

But lobbying to GoK against Safaricom is not always as easy since they are one of the country’s largest taxpayers and a vital cash cow that is a consistent source of revenue for GoK increasing expenditure. e.g In the two years prior to Orange arrival, Safaricom paid GoK direct and indirect taxes of 24.1 billion shillings ($320 million) and 18.4bn ($245 million) which is almost as much as the 25 billion that Orange paid for their investment.

Outlook: Looking at the Orange parent accounts (France Telecom) for year 2009, it appears that Orange Kenya has no value (invested EUR 244m in 2007, wrote it all off in 2008) and is now also listed as an asset available for sale.

But Orange could look on the bright side and see that the market is changing while the “rags to riches” tale of safaricom success, as told by CEO Michael Joseph may never be replicated, the market potential is there; whatever mistakes they have made in technology selection, product rollout, and marketing can be fixed. Joseph is himself expected to retire by the end of the year taking away an intangible brand impact from the company, and a compromise is likely to be reached with 3G license cost, EASSY fibre, inter-connection rates and number portability which will ease the environment for new investors Essar (Yu), Bharti Airtel (who are buying Zain Africa assets) and Orange.

Farewell RVR

So it’s now clear to all that the Rift Valley Railways era of managing the Kenya to Uganda RVR railway concession may end in the next few days.

And it’s now apparent to many that Roy Puffett, the RVR Managing Director, was a conman, who conned two governments (Kenya and Uganda), the International Finance Corporation (IFC) and PAC who brokered the deal. Running railways is not easy it seems and even Tanzania want to end a troubled rail concession granted to an Indian Company

Puffet has been silent, holed up in boardrooms trying to squeeze out more payments while the clock is ticking. Much has changed in three years when many thought he was another Michael Joseph (Safaricom) who would save the railway from collapse and transform it to unparalleled success thought private management

In 2007, he gave a public talk to members of the Institute of Economic Affairs (IEA talk) and the public that is republished below:

New start: RVR is a 25-year concession between a consortium of companies and the governments so Kenya and Uganda.

RVR got off to a start in November 2006 and suffered 61 derailments that month. They have since slowed down all their trains as a measure to contain such incidents. They now average 10 – 12 incidents a month – from a combination of equipment, railway and human failures (including sabotage)

Financial & Investment: So far the consortium has invested about $18 million. The shareholding is 70% foreign (Sheltam, and an Australian company) and 30% local (Transcentury – 20%, ICDCI – 10%) and some financing was sourced from the IFC.

Some attendees later asked why Kenyans were not given a chance to invest in the company (like the Kengen IPO) to which the MD replied that there were not a lot of investors rushing to build railways in Africa (only 2 groups bid for the concession).

Equipment: RVR inherited 174 locomotives from Kenya (55 were working) and 44 from Uganda (25 operational). Also 46% of the 7,000 wagons were usable.

They have focused on getting a working fleet going. This has entailed reducing the fleet to contain only trains in good condition and they also got back 5 locomotives from Magadi Soda. Fleet repair is slow as the company faces a lead time of 8 months for locomotive spares.

Their workshops were run down, with no tools or equipment, and many of the sheds had long been taken over by other businesses. The remaining sheds had leaking roofs, and when it rained they had to stop maintenance work for fear of electrocution.

Railway: Demand from china for steel has driven steel prices through the roof. There are few companies making railway parts (and African countries have a different railway size) so it takes about 8 months to deliver (they have to order 4,000 tons at a go) which is expensive. One engineer (from the UK) at the talk said that such a railway would be shut down with all the incidents if it was in Europe – the MD replied probably true but this was the state of things. He added that new rails were be laid on the Mombasa – Nairobi line after which the older ones will be taken out and used for other upcountry lines.

They will also close some stations (there are 50+ stations between Nairobi and Mombasa) and have installed communications and tracking systems on all trains and stations

Operations: RVR have done quite well since they took over in November 2006 and move about 200,000 tons per month. While this has not changed much in volume from before the concession, they are achieving this with two differences (i) they are using a smaller fleet (ii) and they are collecting more revenue (from increased efficiency & reduced corruption in revenue collection) – about $6m a month. Their volumes dipped in December and April following flooding from the rains. The MD mentioned that they now take between 4 – 7 days to move cargo from Mombasa to Kampala – from 20+ days before, though some members of the Kenya Shippers Association disputed that there.

Other Stakeholders
Employees those not retrenched by the company are all being retrained in safety and modern railway processes

Customers: While there have been complaints about the slow movement from the Mombasa port (including by the Kenya Ports Authority), the MD said that 50% of the 14,000 containers at the Mombasa port don’t have proper documentation.

He added that business people were contributors to this i.e. as a result of the past railway inefficiency, companies had taken to using railway train wagons at Mombasa as extra storage facilities. But when the railway movement improved, and cargo was now moved upcountry, the same businessmen took their time to offload goods, creating more congestion.

They have tried to contain prices and their charges ($0.05 per ton per km) compare well with, truck companies (that taken advantage of rail inefficiency to jack up prices)

Passengers & Commuters: they will run commuter train services (in Nairobi) for 5 years, but this is one thing none of the bidders for the concession wanted to continue running – as it is a loss-maker.

Kenya Railways: The corporation still exists and will oversee the concession on behalf of the government of Kenya, while also maintaining a register of railway assets. The corporation still has a great burden from the past – illustrated by Kshs 31 billion of debts (about $600 million). Including a 12 billion pension deficit. They hope to use land sales to pay off their employee (and perhaps supplier) obligations while also talking with the governments to waive some debt. They have also received 1 billion shillings form the world bank to resettle some residents in Kibera who live/work too close to the railway line (but this plan/financing is already 1/ ½ years behind schedule)

Summary: The MD mentioned that there was a lot of expectations about the now-concessioned railways – some of which were not close to being realistic. He also added that they had fewer customers as a result of the slow uptake by the concession, but added that RVR had no regrets and that the governments of Kenya and Uganda were very supportive.

So, a rough but promising start by the company who now say they have enough locomotives working to achieve their 5-year targets. Will they be a celebrated success like Safaricom? We’ll know in a few years.

Co-Op IPO Aftermath

A formal statement is out today after Monday’s press conference where the bank’s management revealed that through their 2008 IPO, Co-op Bank had raised Kshs. 5.4 billion (~$77 million) but short of a revised target of Kshs 6.7 billion as 66,576 shareholders bought 546 million shares. The Business Dailyreports the shares will be allocated 60% to individual investors (340.5 million shares) , 30% to institutions (171 m shares ) and staff will get 9% (52.6 m shares)

Capital raising: the offer was not underwritten (by D&B winner – best lead transaction advisor and best investment bank), but despite the shortfall, what was raised should be enough for a few years. Co-op’s capital adequacy goes from 9% to about 18%, which is not bad [10 billion would have taken to this to 22%]

Other banks that have been reported to have engaged in recent private capital raising include K-Rep and Southern Credit while others who may need to tap shareholders next year could Chase, CBA, CFC Stanbic and even KCB (for the third time in five years?)

Glass Half Full: Though Co-op had initially set out to raise Kshs 10 billion, their listing came at a tough time and was not received as enthusiastically as past IPO’s. Still it had some positives but came in a tough market before the target was revised down, but has some positives

– For the bank: 66,000 shareholders is a manageable register , and since they did a lot of the placement and receiving work in house, the IPO was not as costly as others (budgeted at Kshs. 248 million)
– For new shareholders: no refunds to queue for, and for once a 100% allocation
– For other serious investors, a brief return to sanity as the IPO speculators with their borrowed funds kept away – Co-op was the fall guy that injected some reality back into IPO process and share investments.

2009 IPO’s: Next year could see the entry of Nakumatt supermarkets, bread maker a DPL and others from the private sector.

From the public sector (Government side) comes a series of planned privatizations a few of which could be IPO candidates to assist the Government in fund-raising:

Top of my my wish list is Kenya Pipeline, whose much improved governance saw a consortium of banks line up this month to offer the company funds for expansion (a few years ago KPC was using dubious financial intermediaries) and Kenya Wine Agencies. In addition, more shares of Kengen East African Portland Cement Company and National Bank will be sold to the public.

Other non-IPO candidates will be targeted at strategic partners [for Kenya Ports Authority- and TEAMS (submarine cable)] while private investors may be sought to invest in the sugar companies [Chemelil, Sony, Nzoia, Miwani, Muhoroni] hotels of Kenya Tourism Development Corporation, banks [Consolidated Bank, Development Bank of Kenya] and food processors [Kenya Meat Commission, New Kenya Co-operative Creameries]