Kenya’s Unlikely Good News: An IPO Launch

It's been a tough year for Kenya. A disputed presidential election triggered the country's worst period of violence since the African nation gained independence from Britain, leaving hundreds dead and thousands homeless. It took four months—and strong international pressure—to cobble together a power sharing deal between the country's two main politicians. However, the new government hasn't made life much easier in a country where the battered economy is making many newly jobless, hundreds of thousands are still stuck in internal displacement camps, and millions more are struggling with the unrelenting rise of staple food prices.

But this week Kenyans finally got something to cheer about. Safaricom, Kenya's largest mobile phone provider and the most profitable company in East Africa, began trading Monday morning on the Nairobi Stock Exchange. The public offering of a 25 percent government stake in Safaricom has raised more than $800 million, in what's projected to be the largest IPO ever completed in sub-Saharan Africa, exceeding those of Sanlam and Telkom SA in the continent's powerhouse, South Africa. The IPO caused a frenzy when shares were made available to the local public in March and April, with thousands of middle-class Kenyans lining up in droves outside banks and brokerage houses to buy shares for five shillings (eight cents) apiece. Shares set aside for international investors were oversubscribed by 711 percent, according to Kenyan Finance Minister Amos Kimunya. The success of the Safaricom IPO could go a long way in reaffirming the vitality and resiliency of the Kenyan economy, long considered one of the strongest in Africa. The money the IPO has raised could also be a direct boost to the country's recovery and reconciliation efforts, with the government promising to spend the IPO proceeds on resettlement and rebuilding projects for the victims of the political crisis.

Safaricom may seem an unlikely success story in a country where 80 percent of the population lacks electricity and the majority still lives on less than $2 a day. But the company, which is jointly owned by U.K. mobile phone giant Vodafone, has thrived by developing ways to make calls affordable to ordinary people. Part of its strategy: offering pay-as-you-go lines for less than $1, airtime scratch cards in small denominations and cheap handsets that some have even put to use as shared "village" phones where no land lines are available. These tactics have paid off. The company now has more than 10.4 million subscribers—up from about 17,000 in 2000—and profit margins upward of 25 percent. Its pre-tax profit for the last fiscal year was $223.1 million. "[Safaricom] gave us billing by the second when other networks charged by the minute, [and] we get the same rates when we travel elsewhere in Africa," says Tony Kinyua, a Kenyan filmmaker who was among those trying to snap up the shares. "It's made for the middle class; it's a really Kenyan thing we use and trust."

Some of Safaricom's innovations have had a broader social impact, too. It uses diesel generators to power its network base stations in remote areas and is currently testing a greener base station model that's powered by small wind turbines and solar panels. The company has also found a niche with a phone-based money transfer service, called M-Pesa, that allows customers to send cash back and forth more quickly, conveniently and inexpensively than traditional transfers. Recently Irish aid group Concern International used the service to distribute aid money directly to rural Kenyans living in inaccessible remote areas, in a pilot program that could change the way aid is distributed elsewhere in Africa. "Safaricom adapted to their target market—the lower end—very well," says Thecla Mbongue, a mobile phone strategy analyst at Informa Telecoms and Media in London. "They have shown mobile phone companies can find ways to be profitable in Africa, as well as, in some sense, improve lives."

The Safaricom success story does, of course, come with some caveats. Other companies, both inside and outside Kenya, are also trying to cash in on the lower end of the mobile phone market. Its main competitor, Celtel, is increasingly tailoring its offerings to cut into the Safaricom customer base. Two new telecom networks from India and France are also preparing to enter the mobile fray in Kenya, perhaps spurred on by pending legislation that would permit phone number portability and further liberalize the market. Though Safaricom reported record profits and is forecast to grow even further this year despite the election turmoil that stunted growth in many other economic sectors in Kenya, some analysts believe that Safaricom's dominance on the Kenyan market may have hit its peak. "Safaricom certainly has a competitive edge, but there's a feeling that its core services aren't enough to satisfy high expectations going forward," says Tiberius Barasa, a research fellow at Nairobi's Institute of Policy Analysis and Research.

With a market cap of about $16 billon, Safaricom's current value is equal to about 10 percent of Kenya's GDP and accounts for more than 25 percent of the value of the entire Nairobi Stock Exchange. So a lot is riding on how it performs. As with any publicly traded company, its success will continue to hinge upon good strategy and good leadership, but any positive signals from this week's IPO will not mean much in the long term if there isn't total accountability and transparency to the shareholders, Barasa says. In the lead-up to last year's elections, the opposition Orange Democratic Movement protested against Safaricom's going public before the identity of a mystery shareholder consortium said to own about 10 percent of the company was divulged. That has yet to happen. Prime Minister Raila Odinga, then the opposition leader who led the protests, has since eased his hardline stance on identifying Safaricom's anonymous stakeholders. His urging of Kenyans to buy shares has been credited with the IPO's overwhelming retail demand, in which just 21 percent of individual Kenyan investors who applied got shares.

Still, for those lucky enough to get shares in the IPO, the launch was long anticipated. By the afternoon of opening day, the stock was up close to 50 percent, trading at 7.5 shillings (about 12 cents). "It may not make me rich, but at least I have my piece," says Chris Owaga, a biomedical research assistant who waited among a capacity crowd in the west Kenyan city of Kisumu. Owaga was amused by the chatter among fellow Kenyans dreaming of what they would do if their shares skyrocketed in value on opening day, but he's trying to take a more realistic approach. "It takes time for a plant to grow into something," he says. Still, Owaga does see at least one immediate upside to the Safaricom hoopla: it's given people a distraction from the talk of politics. "It's good now: we Kenyans are back to business."