Safaricom's Big IPO in Africa

The success of the Kenyan mobile service provider restores investor confidence in a country rocked by violence and political instability

by Jack Ewing and Eliza Barclay

The mobile-phone industry has shown it can thrive in countries beset by political turmoil, so why shouldn't a mobile industry initial public offering thrive?

On June 9, shares in Kenyan mobile service provider Safaricom will begin trading on the Nairobi Stock Exchange, in the biggest IPO ever in sub-Saharan Africa. The listing of 25% of the company owned by the Kenyan government—which is expected to raise $800 million and value Safaricom at $3.2 billion—seems remarkable considering the country only recently emerged from intertribal violence touched off by disputed presidential elections in December. More than 1,000 people died and 500,000 were displaced from their homes—and trading at the Nairobi Stock Exchange collapsed.

But Safaricom, in which Britain's Vodafone (VOD) indirectly holds a 40% stake, already has overcome tough circumstances to become one of Africa's most profitable and well-regarded companies. The share offering also seems to have been a hit. Some 750,000 Kenyans, who could buy shares for 8¢ apiece, applied for an allotment, sometimes lining up at banks to register. "Initially I didn't know so much about the shares, but I was able to consult with some colleagues and they said, 'An IPO is very good, don't be left out,'" says Thomas Bwire, 27, a part-time preschool teacher who hopes to make enough money to open his own school.

In fact, demand from domestic investors is so strong the government may exercise an option to increase the portion of Safaricom shares allocated to Kenyans beyond the current 65% of the total. That will leave a relatively small slice for foreign institutional investors, who are also keen to get in on the action. (Indeed, shares allotted to non-Kenyan investors are already six times oversubscribed.) Even after a 10% premium tacked on for foreign buyers, fund managers say the issue is priced right. And the size of the IPO means the stock will be easy to trade, in contrast to many other African issues where volumes are often thin.

Demand Affects Other Exchanges

"From a valuation point of view it's an attractive story," says Jens Schleuniger, a fund manager who follows African stocks for the DWS Investments unit of Deutsche Bank (DB). "It's going to be a very sizable company in African terms, with strong management and a dominant market position."

Demand has been so strong in Africa that trading volumes in some other exchanges in the region have plunged as investors set aside money to buy Safaricom shares. At the Uganda Securities Exchange in Kampala trading has fallen by half (BusinessWeek.com, 5/30/08). "The tremendous demand for Safaricom, the amount of money that has been raised is mind-boggling in terms of the Kenyan market," says Mohammed Hassan, joint managing director at Dyer & Blair Investment Bank in Nairobi, which, along with Morgan Stanley (MS), is lead adviser for the issue. Morgan Stanley is also the global coordinator.

Safaricom, founded in 1997, is among the companies to have shown that mobile-phone service in emerging markets was not only possible, but profitable (BusinessWeek.com, 8/27/07). But to succeed, it has had to innovate from the top down. To overcome lack of reliable power, for instance, Safaricom built base stations powered by diesel generators. To make service accessible to very poor people, it sells prepaid airtime on scratch cards for as little as 40¢.