KENYA: SAFARICOM IPO GETS GREEN LIGHT

UNCLAS SECTION 01 OF 02 NAIROBI 000762 SIPDIS SENSITIVE SIPDIS STATE PASS USTR - BILL JACKSON AND JONATHAN MCHALE STATE FOR AF/E, AF/EPS AND EB/CIP E.O. 12958: N/A TAGS: ECON ECPS EFIN PGOV KE SUBJECT: KENYA: SAFARICOM IPO GETS GREEN LIGHT REF: 07 NAIROBI 4202 NAIROBI 00000762 001.2 OF 002 Sensitive-but-unclassified; not for release outside USG channels. ¶1. (SBU) Summary: With all elements of the new Kenyan coalition government in agreement, Kenya's Minister of Finance has given the green light for the launch on March 28 of the largest initial public offering (IPO) in the country's history. The government will sell to the public $770 million in shares of Safaricom, Kenya's leading mobile phone company, in a deal that is expected to re-energize both domestic and international interest and investment in the Kenyan economy. Just as important, the IPO will generate cash for a budget that badly needs money for post-crisis economic reconstruction. End summary. -------------- Safaricom IPO to Launch March 28 -------------- ¶2. (U) Kenyan Minister of Finance Amos Kimunya publicly announced on March 14 that the Government of Kenya (GOK) would launch on March 28 the much-anticipated initial public offering (IPO) of shares in mobile phone company Safaricom, Kenya's largest and most profitable company. As reported reftel, the IPO has been in the making for some time and is widely expected to be the largest IPO in the history of the Nairobi Stock Exchange (NSE). -------------- The Price is Right? -------------- ¶3. (SBU) In his March 14 announcement, Kimunya said the deal will involve the sale of 10 billion shares of Safaricom (representing 25% of the company) at KSh5 per share for total proceeds of approximately KSh50 billion - or about $770 million. The government will retain 35% of Safaricom's shares. It appears that the GOK on the one hand wanted to maximize the proceeds of the IPO. But it also wanted to ensure the public, including small retail investors, are able to share in the wealth generated by the offering. Kimunya thus said the price represents a 14% discount of the actual book value of the firm. It might be an even steeper discount. Speaking to Econ/C March 17, Permanent Secretary Bitange Ndemo of the Ministry of Information and Communication commented that traditional valuation methodologies for mobile phone companies indicate Safaricom might be worth as much as $10 billion in total. ¶4. (U) The offering will be divided into two pools, with 65% set aside for domestic investors and 35% for foreign institutional investors. If, however, the domestic pool is oversubscribed by more than 200%, the foreign pool can be reduced to as low as 20%. It's quite possible this will happen, as IPOs held in 2007 generated spectacular domestic demand, and Safaricom is a much higher profile and more profitable company. The IPO period will last from March 28 to April 23, and secondary trading on the NSE will begin on June 9. The IPO is expected to attract as many as 10 million individual investors and significantly boost NSE trading volumes. -------------- The Politics of Privatization -------------- ¶5. (SBU) The Safaricom IPO has been months in the making, and was part of a larger set of important interlocking reforms in the telecom sector (see reftel). The proceeds, originally forecast to be KSh35 billion ($540 million),were also seen as critical for plugging a GOK budget deficit forecast in June 2007 to be 5.3% of GDP. The GOK was unable, however, to bring the IPO to market late in 2007 prior to the December 27 election. When the disputed results of the election touched off severe civil unrest and economic mayhem in January and February, it was even less clear when the GOK would be able to successfully launch the deal. ¶6. (SBU) One reason the IPO was not brought to market in 2007 was opposition from the Orange Democratic Movement (ODM),led by ODM presidential candidate (and now presumptive Prime Minister - see below) Raila Odinga. Fearing the GOK would use the proceeds of the IPO as its campaign war chest, the ODM sought to have the IPO halted through the courts. ODM legal arguments were recognized by the courts as frivolous, but court proceedings contributed to delays that made bringing Safaricom to market before the elections untenable. ¶7. (SBU) Kimunya's March 14 announcement is thus as much a symbol of political reconciliation as of economic common sense. Indeed, the GOK's ability to move ahead so swiftly after the political crisis of NAIROBI 00000762 002.2 OF 002 January and February stems directly from the landmark February 28 power sharing agreement reached by President Mwai Kibaki and Odinga. The agreement abruptly ended the crisis and has set the stage for political stability and reform in the weeks and months ahead, with Odinga joining government in a newly-created prime ministership. In this new context, Kimunya was able to have a private lunch with Odinga, an erstwhile bitter political enemy, just prior to his IPO announcement. In a well-choreographed piece of political goodwill, Odinga expressed his support for the IPO, and Kimunya later commented that Odinga also expressed a personal interest in participating in the IPO as an investor. -------------- Comment: A Quadruple Play for Kenya -------------- ¶8. (SBU) It is possible something unforeseen could derail the Safaricom IPO altogether, or that it will be marred by questionable share allocations to insiders at the expense of small-time investors - as has happened in the past at the NSE. But we feel cautiously optimistic that the IPO will be broadly successful. If so, it will amount to a quadruple play for Kenya. First, as noted, it both derives from, and helps reinforce, political reconciliation, with the two former rival camps anxious to be seen as doing the right thing for the country. Second, with international participation, the IPO will hopefully help repair the damage to Kenya's brand image and attract the interest of international investors not just to the IPO, but beyond that to a sovereign bond issue that was also being planned prior to the post-electoral crisis. Third, as noted in reftel, the IPO amounts to the privatization of Safaricom, and together with other related events and reforms, it helps set the stage for greater compeition, better services, and much lower costs across the economy for businesses and consumers alike. Finally, Kenya needs the money. In fact, the GOK had already budgeted for the Safaricom proceeds even before the political crisis. The economic damage done by the latter makes it even more imperative that funds be found to finance reconstruction and reconciliation. Ranneberger