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.

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Safaricom IPO to Launch March 28
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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).

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The Price is Right?
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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.

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The Politics of Privatization
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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

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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.

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Comment: A Quadruple Play for Kenya
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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