Safaricom’s equity deal with IFC to hit earnings

Shareholders at Kenya’s largest company Safaricom face reduced dividend earnings on dilution as the International Finance Corporation (IFC) eyes an equity stake in the company.

The move to acquire an equity stake in Safaricom is expected to impact the company’s large number of institutional and retail investors, affecting shareholder earnings.

“With IFC coming in, all the consortium members will dilute in terms of equity, but we will still hold majority shareholding,” Safaricom’s chief financial officer Dilip Pal said.

The financier’s equity stake is valued at $157 million while its debt is estimated to be worth $100 million. The $100 million (Sh3.4 billion) worth of debt will be converted to $157 million (Sh21 billion) equity in swap the deal. This will happen if ongoing negotiations are concluded.

IFC’s entry into Safaricom’s shareholder list is however expected to be beneficial for the company’s growth prospects.

The telco has been exploring several growth opportunities, including its current expansion into Ethiopia, M-Pesa rollout in Ethiopia, and investing in the Internet of Things (IoT) technology to boost growth and revenue.

Risk factors

The revenue from IFC’s investment is expected to provide Safaricom with the necessary financial backing to pursue these growth opportunities.

Safaricom has reported a Sh15 billion drop in its profits for the Financial Year ending March 31, 2023, representing a 22.3 per cent decline, with Dilip saying that rising concentration of revenues on M-Pesa is among risk factors. “The last financial year has been very tough, we are not insulated from global macro challenges and also the change in mobile termination charges dropped last year costing us Sh2 billion,” said Dilip during an interview with NTV.

Safaricom is also facing challenges from the Finance Bill 2023 proposal, which is expected to increase excise duty on Payment Service Providers (PSPs) from 12 per cent to 15 per cent.

The proposed change will impact Safaricom’s revenue further as the company relies heavily on M-Pesa for its earnings.

Safaricom has expressed its concern over the proposed increase in excise duty and has urged the government to reconsider the move. The company has argued that the proposed increase will hurt its customers and stifle innovation in the mobile money sector.

The proposed increase in excise duty is part of the government’s efforts to raise revenue and reduce the budget deficit.  However, Safaricom the move will have a negative impact on the country’s financial inclusion agenda and could lead to a decline in the use of mobile money services.

Despite the challenges posed by the proposed increase in excise duty, Safaricom remains optimistic about its growth prospects.

While voice revenue underperformed with a drop of 2.6 per cent from Sh81.1 billion in the last financial year, M-Pesa revenue grew 8.8 per cent to Sh117.2 billion, while mobile data went up to Sh54 billion, representing a 11.4 per cent rise.

“The business is stable and regained a strong positive momentum in the second half of the year,” Ndegwa said last week, alluding that the future is bright.