Safaricom 2018: The Emerging-Markets Payments Battle - Darden School of Business: University of Virginia
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UVA-F-1843
Jun. 21, 2018
Safaricom 2018: The Emerging-Markets Payments Battle
SAFCOM1 is one of the best companies this author has ever covered over a fairly long career as a financial
analyst, yet it is also one of the most challenging to value, owing to the dual nature of its business—on the one
hand, an increasingly commoditized telecom business, where SAFCOM continues to deliver growth above the
industry average; and, on the other, a fast-growing financial services business with a positive growth outlook.
—Renaissance Capital, October 20172
In March 2018, Greg Rubin sat on his hedge fund’s trading floor in Mayfair, London, working on an
investment memo he planned to present to fellow members of his investment committee later that day. The
investment option on the table for Rubin’s absolute return emerging market fund was Safaricom, a
telecommunications and financial services company based in Kenya. Ever since the company had achieved
extraordinary success with the launch of its mobile payments solution, M-Pesa, a decade earlier, Rubin had
considered the company a viable investment option. Even so, he still had more information to digest on the
prospects for economic growth within this region of Africa and potential threats to the business before making
a final recommendation to his colleagues.
Considering the competitive threats on the near horizon in the payments space in Kenya (most notably the
recent entry of Equity Bank and the Kenya Bankers’ Association) and the uniqueness of Safaricom’s ownership
structure (with partial ownership from both the government of Kenya and established UK-based telecom player
Vodafone Group PLC [Vodafone] and its South African subsidiary, Vodacom), Rubin wondered if Safaricom
was the right investment. What advantages and risks did such an investment offer, and was there a way to
mitigate these risks as an investor?
Kenya—Background
Rubin’s fund wasn’t the only one in London that had a strict focus on global emerging markets. In fact,
there were countless funds in his vicinity with a similar geographic focus, and by 2018, many investors looking
at the developing world felt these countries were reaching “a transition point,” in which they were developing
1 Safaricom traded under the SAFCOM ID.
2 Alexander Kazbegi, Amine Wafy, and Artem Yamschkov, “Safaricom: Could Sights be Set Too Far in The Future?,” Renaissance Capital, October
25, 2017, 2.
This public-sourced case was prepared by George (Yiorgos) Allayannis, Paul Tudor Jones II Professor of Business Administration, and Jenny Craddock,
Case Writer. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright © 2018 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to
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Page 2 UVA-F-1843
beyond the industrial revolution and into the digital age. One CIO (chief investment officer) of a prominent
emerging-market fund was quoted earlier in the year as saying that “the story for emerging markets [was] one
of outperformance…In the next five to ten years, it’s obvious that [emerging markets] should be more of a
play,”3 thereby implying that funds like his should be focusing even more on the emerging-markets space in
the future.
Due to Rubin’s extensive career researching companies in the emerging-markets space, he was already well
aware of the economic context surrounding firms operating in Kenya, but he decided to refresh his knowledge
of both historical and recent events in the region before that afternoon’s meeting. (For a map of Kenya and
selected countries nearby in Africa, see Exhibit 1.)
Once a crown colony administered by a British governor, Kenya gained its independence in 1963, and its
constitution placed a prime minster at the head of its cabinet.4 Over the next few years, power was transferred
to an executive president, and the country operated as a single-party democracy, only electing officials allied
with the Kenya Africa National Union (KANU) party.5 During the 1980s, elected officials “repressed
disagreement within the party and outlawed opposition from without,” and the government “gained a
reputation for brutality and corruption” until 1992, when a multiparty system was restored.6 In 2002, the
disparate opposition parties unified, and the country’s third president, Mwai Kibaki, was elected from this newly
formed coalition. Several years later, during the general election of 2007, in which Kibaki was reelected, the
announcement of the results caused disputes that caught the world’s attention. Seven weeks of violence and
dislocation of citizens ensued, ultimately claiming 1,200 lives.7 One journalist believed “the country narrowly
avoided a calamitous breakdown.”8
Peace was finally restored when a coalition government was formed in 2008, naming Kibaki as president
and his opponent, Raila Odinga, as prime minister.9 For several years thereafter, Kenya was held up as an
example of democracy in an otherwise unstable region, but chaos returned in 2017, when Odinga narrowly lost
the election to his opponent, Uhuru Kenyatta, and called foul play.10 Kenya’s Supreme Court agreed with
Odinga’s accusations of seven million uncounted votes and nullified the results, making the occasion the first
time a court in Africa ever nullified an election.11 When the repeat vote occurred in October 2017, Kenyatta
won in a landslide, after Odinga boycotted what he believed were unfairly run elections and urged his supporters
to do the same. Despite the lingering questions around election credibility and the recognition of Kenyatta’s
governing party, the country remained peaceful in the ensuing months, and in March 2018, Odinga and
Kenyatta made a joint appearance saying they were putting the past behind them.12
3 Ben Bartenstein, “Hedge Fund Sees ‘Significant Correction’ in Emerging Markets,” Bloomberg, January 25, 2018,
https://www.bloomberg.com/news/articles/2018-01-26/hedge-fund-veteran-says-emerging-market-stocks-due-for-breather (accessed Mar. 14, 2018).
4 “Kenya Profile—Timeline,” BBC News, January 31, 2018, http://www.bbc.com/news/world-africa-13682176 (accessed Mar. 14, 2018).
5 Kenneth Ingham, Mwenda Ntarangwi, and Simeon Hongo Ominde, “Kenya,” Encyclopedia Britannica, April 13, 2018,
https://www.britannica.com/place/Kenya (accessed Mar. 15, 2018).
6 “Kenya African National Union,” Encyclopedia Britannica, https://www.britannica.com/topic/Kenya-African-National-Union (accessed Mar. 14,
2018).
7 “A Brief History on Kenya,” Embassy of the Republic of Kenya in Japan, http://www.kenyarep-jp.com/kenya/history_e.html (accessed Mar. 14,
2018).
8 “A Happy Roar from Kenya,” Economist, June 9, 2008, https://www.economist.com/node/11525262 (accessed Mar. 15, 2018).
9 Conor Gaffey, “What Is Going On with Kenya’s Chaotic Presidential Election?,” Newsweek, October 25, 2017, http://www.newsweek.com/kenya-
election-raila-odinga-uhuru-kenyatta-692492 (accessed Mar. 14, 2018).
10 http://www.newsweek.com/kenya-election-raila-odinga-uhuru-kenyatta-692492.
11 http://www.newsweek.com/kenya-election-raila-odinga-uhuru-kenyatta-692492.
12 Faith Karimi, “Kenyan President, Opposition Leader Say Feud Over After Months of Tension,” CNN, March 9, 2018,
https://www.cnn.com/2018/03/09/africa/kenya-odinga-kenyatta-joint-speech/index.html (accessed Mar. 15, 2018).
Page 3 UVA-F-1843
Despite these displays of reconciliation, Luxembourg-based research and consulting firm International
Strategic Analysis (ISA), known for its widely used country intelligence, conducted its summary of internal and
external political risks facing all the countries in sub-Saharan Africa in early 2018 and ranked Kenya’s overall
domestic political risk as “high” (scoring 8.6 out of 10). ISA gave Kenya an equally alarming international
political risk of 8.6 due to Kenya’s frequent citation as one of the most likely terrorist targets in Africa. Indeed,
in 2014, Somali extremists linked with al-Qaida had made several gun and bomb attacks on Kenya, resulting in
over 100 deaths that year,13 and in 2015, an East African jihadist group carried out a massacre at a college in
Northwest Kenya, killing nearly 150 people. (See Exhibit 2 for ISA’s Political Risk forecasts for Kenya in
comparison to nearby African countries.)
The Kenyan economy
Alongside this context of political tumult and uncertainty, the economic situation in Kenya offered a mixed
bag of promising and ominous signs. On one hand, Kenya was blessed by its location alongside the Indian
Ocean, giving it a thriving port of Mombasa and the role as a logistics hub in the region. The country had a
“dynamic private sector,”14 with a strong reliance on tourism due to the country’s attractive national parks and
game reserves.15 As a result of the country’s colonial history, English was recognized by law as one of Kenya’s
two official languages (in addition to Swahili) and widely used in business, law, and academia.
By 2016, Kenya’s population had reached 48.5 million.16 (For Kenya’s recent population growth compared
to that of Uganda and Tanzania, see Exhibit 3.) The annual population growth rate from 2015 to 2016 was
2.6%, with 41% of Kenya’s population under the age of 15 at that time.17 Because the average number of
children per female was declining (down to 4.4 children in 2015) and thus getting closer to the (also declining)
mortality rates, the country was on a long-term path to a population age structure that might enable Kenya to
experience a demographic dividend, a popular term coined by economists to describe the rapid boost in
economic growth18 that resulted from changing a country’s population age structure, with more adults in the
labor force and fewer children to support.19 Other regions in the world, such as East Asia, had already
accelerated economic growth through achieving such a demographic dividend, but African countries, with their
still-high fertility and decreasing mortality rates, still hadn’t tapped this opportunity.20
Considering Kenya’s young population, Rubin decided to look into how the workforce was leveraged in
the country. In 2017, the World Economic Forum’s Human Capital Report, which quantified how countries
developed and deployed their human capital based on education, skills, and employment options available in
the country (and also offered insight into how well a country was positioned for deploying talent in the future),21
ranked Kenya #78 out of 130 global economies for its leveraging of human capital (and #5 out of 29 countries
13 Associated Press in Nairobi, “Kenya Bus Attack Surivor Tells How Gunmen Selected Their Victims,” Guardian, November 22, 2014,
https://www.theguardian.com/world/2014/nov/23/kenya-bus-attack-survivor-tells-how-gunmen-selected-their-victims (accessed Mar. 15, 2018).
14 “The World Bank in Kenya,” World Bank, April 19, 2018, http://www.worldbank.org/en/country/kenya/overview (accessed May 8, 2018).
15 http://www.worldbank.org/en/country/kenya/overview.
16 “Population, Total,” World Bank, https://data.worldbank.org/indicator/SP.POP.TOTL?end=2016&locations=KE&start=1960&view=chart
(accessed May 21, 2018).
17 “Demographic Dividend—Kenya,” Johns Hopkins Bloomberg School of Public Health, 2018,
http://www.demographicdividend.org/country_highlights/kenya/ (accessed Mar. 8, 2018).
18 http://www.demographicdividend.org/country_highlights/kenya/.
19 “Demographic Dividend—About,” Johns Hopkins Bloomberg School of Public Health, 2018, http://www.demographicdividend.org/about-
demographic-dividend/, (accessed Mar. 8, 2018).
20 S. Amer Ahmed, “How Significant Could Africa’s Demographic Dividend Be for Growth and Poverty Reduction?,” World Bank, March 2, 2015,
http://blogs.worldbank.org/africacan/how-significant-could-africas-demographic-dividend-be-for-growth-and-poverty-reduction (accessed Mar. 8,
2018).
21 “Top 10 Economies Leveraging Their Human Capital,” World Economic Forum, 2015, http://reports.weforum.org/human-capital-report-
2015/infographics-and-shareables/ (accessed May 21, 2018).Page 4 UVA-F-1843
surveyed in sub-Saharan Africa). (For a summary table of results, see Exhibit 4.) The report expressed belief
that Kenya benefitted from its:
Large medium-skilled employment sectors and comparatively strong education quality and staff
training, laying the foundation for building their future human capital potential. However, [like Rwanda
and Ghana, Kenya] still ha[d] room for further improvement in their secondary education enrolment
rates, ensuring this progress is shared as broadly as possible across their populations.22
By 2018, despite these advantages in its education quality and training, Kenya had one of Africa’s highest
unemployment rates and worst-performing economies in sub-Saharan Africa.23 (See Exhibit 5 for ISA’s
economic forecasts for Kenya compared to nearby countries.) The country’s GDP topped USD70.5 billion in
2016, but its growth was average for the region.24 (See Exhibit 6a for GDP over time, Exhibit 6b for GNI
per capita over time, and Exhibit 7 for recent and expected GDP growth in Kenya compared to other
countries.) The country was also underbanked, with many Kenyans excluded from the formal financial system.
In 2014, only 55.2% of Kenyans aged 15 and older had a bank account at a financial institution.25
That same year, the country made its debut in the sovereign bond market and raised USD2 billion from
international investors, with strong demand from pension funds, insurers, and sovereign wealth seekers.26
“Investors placed orders for more than four times the amount that Nairobi finally raised, suggesting [there was
a] strong appetite for higher risk assets,” the Financial Times reported, but the yields were lower than initially
expected.27 By December 2017, Kenya’s external debt spread compared favorably to those of other emerging
markets (see Exhibit 8). (For data on subsequent sovereign bonds issued including their dates, maturity, and
rates, see Exhibit 9.) That same year, Kenya’s average annual inflation rate was 7.7% (compared to 6.6% in
2016). (See Exhibit 10 for overall inflation in Kenya and Exhibit 11 for Kenya Central Bank’s recent interest
rates.)
As Rubin reviewed these recent economic indicators, he was also aware that investing in Kenya exposed
investors to the risk of shilling depreciation. He had not forgotten the financial turmoil that hit Kenya in 2011,
when the Kenyan-shilling-to-British-pound rate swung dramatically, and the future of the exchange risks was
difficult to forecast. (See Exhibit 12 for recent British-pound-to-Kenyan-shilling exchange rates.) “The Kenyan
shilling has been a major outlier compared with other African currencies, raising concerns that it may be due
for a significant correction,” one analyst noted.28
Safaricom—Background
Within this regional context, Rubin next looked into Safaricom’s history. In 1993, the government company
Kenya Post and Telecommunications Corporation (KPTC), which provided postal and telecommunications
services across Kenya, launched Safaricom as a monopolistic mobile-telephone-network provider. In its early
22 World Economic Forum, The Global Human Capital Report, 2017, https://weforum.ent.box.com/s/dari4dktg4jt2g9xo2o5pksjpatvawdb (accessed
May 21, 2018).
23 International Strategic Alliance, Country Risk Ratings, Q1 2018, November 29, 2017.
24 USD = US dollars; KES = Kenyan shillings; GBP = British pounds.
25 “DataBank: Global Financial Inclusion,” World Bank, http://databank.worldbank.org/data/reports.aspx?source=1228 (accessed May 22, 2018).
26 Katrina Manson and Javier Blas, “Kenya’s Debut $2bn Bond Breaks Africa Record,” Financial Times, June 16, 2014,
https://www.ft.com/content/4397a32a-f572-11e3-be21-00144feabdc0 (accessed Mar. 14, 2018).
27 https://www.ft.com/content/4397a32a-f572-11e3-be21-00144feabdc0. The article elaborated: “The capital raising yielded two notes: a
[USD]500 million, 5-year bond paying an interest rate of 5.875%, and a [USD]1.5 billion 10-year note with a yield of 6.875%.”
28 Madhvendra Singhand Polina Ugryumova, “Safaricom—Higher Risk Perception Price In,” Morgan Stanley Research, March 16, 2017, 7.Page 5 UVA-F-1843
days, Safaricom was run as a department within KPTC and relied on analog networking technology before an
upgrade in 1996 to GSM (Global System for Mobile Communications) technology to provide a more reliable
mobile communications network. Despite this upgrade, Safaricom’s mobile voice and data services were in low
demand among Kenyan consumers during the 1990s due to the high operating and consumption costs.29
In 1997, Safaricom spun off from KPTC as its own state company, officially forming Safaricom Ltd.; in
1999, the company was granted a license to operate in the mobile telecommunications space.30 With this license,
external investor interest was piqued, most notably from Vodafone, the leading cellular communications service
provider in the United Kingdom. Vodafone’s interest in Safaricom was not surprising, given the exciting
opportunity that many developed telecommunications players saw in the African telecommunications market
at the time (despite the need to contend with the challenges of the region’s limited infrastructure).31 In fact,
Vodafone had officially entered the continent in 1994 as one of the founding partners of Vodacom Group, a
South Africa–based network provider.32
Building on this African expansion, Vodafone purchased a 40% stake of Safaricom from the Kenyan
government in May 2000,33 and the other 60% was acquired by Telkom Kenya Limited.34 Following this change
of ownership, Safaricom was relaunched in July 2010 as a joint venture between Vodafone UK and Telkom
Kenya,35 and Vodafone assumed management responsibility for the company.36 As such, Vodafone appointed
American citizen Michael Joseph as Safaricom’s CEO,37 and Joseph faced a tremendous amount of work ahead:
when he first started at Safaricom, the company had five employees working out of a three-bedroom
apartment.38
Despite its humble beginnings, Safaricom enjoyed a period of extraordinary growth over the next few years,
quickly becoming a “super brand and one of the most respected companies in Kenya and Africa as a whole.”39
One of the key aspects of this “super brand” was the company’s clear identification as Kenyan: Safaricom’s
principal color was green, one of the several colors of the Kenyan flag, and it used the Swahili language in its
product names and advertising campaigns.40 Because landline options were so “dire” in Kenya and elsewhere
across the continent, rich and poor Africans enthusiastically flocked to mobile phones during the first decade
of the 2000s, creating a remarkable amount of proliferation in the space. In June 1999, Kenya had 15,000 mobile
subscribers, and by 2007, that number had ballooned to eight million, with Safaricom enjoying the position of
being both the country’s biggest mobile operator and the most profitable company for the entire first decade
of the 21st century.41 Much of this success was attributable to several of Joseph’s budget-friendly pricing
29 Paul Ingati, “Safaricom Limited,” in International Directory of Company Histories 125, ed. Drew Johnson (Detroit: St. James Press, 2011), 423–6.
30 “Safaricom Prospectus,” Scribd, 70, https://www.scribd.com/doc/7088318/Safaricom-Prospectus (accessed May 22, 2018).
31 Amy Thomson, “Vodafone Africa Becomes Profit Machine via Banking,” Bloomberg, January 9, 2013,
https://www.bloomberg.com/news/articles/2013-01-09/vodafone-africa-becomes-profit-machine (accessed Mar. 1, 2018).
32 https://www.bloomberg.com/news/articles/2013-01-09/vodafone-africa-becomes-profit-machine.
33 “Safaricom and Vodafone Launch M-PESA, a New Mobile Payment Service,” Vodafone, March 13, 2007,
http://www.vodafone.com/content/index/media/vodafone-group-releases/2007/safaricom_and_vodafone.html (accessed May 22, 2018).
34 https://www.scribd.com/doc/7088318/Safaricom-Prospectus, 59. Another successor of KPTC, Telkom Kenya enjoyed a monopoly on landline
operations in Kenya, but the state-owned company was notorious for its poor services and corporate inefficiency. See Singh and Ugryumova,
“Safaricom—Higher Risk Perception Price In,” 7.
35 Safaricom, “Directors and Senior Leadership Team,” in Safaricom Annual Report 2014,
https://www.safaricom.co.ke/annualreport_2014/public/downloads/BOARD%20OF%20DIRECTORS%20PROFILES.pdf (accessed May 22,
2018).
36 http://www.vodafone.com/content/index/media/vodafone-group-releases/2007/safaricom_and_vodafone.html.
37 https://www.safaricom.co.ke/annualreport_2014/public/downloads/BOARD%20OF%20DIRECTORS%20PROFILES.pdf.
38 Ian Omondi, “I’d Like to Die in Kenya, Says Michael Joseph,” Citizen Digital, November 29, 2017, https://citizentv.co.ke/news/id-like-to-die-in-
kenya-says-michael-joseph-183630/ (accessed Mar. 7, 2018).
39 Ingati, “Safaricom Limited,” 425.
40 https://www.scribd.com/doc/7088318/Safaricom-Prospectus, 64.
41 Ingati, “Safaricom Limited,” 423.Page 6 UVA-F-1843
strategies, including a “pay as you go” option that allowed customers to pay for mobile airtime before using it
(thus removing any credit risk for Safaricom) and billing by the second, a helpful offering for those living in
poverty.42
In October 2007, Safaricom was the first telecommunications company in Kenya to be licensed to operate
3G systems and services—meaning faster access to data and an enhancement of the mobile telecommunications
license granted in 1999. That same year (2007), the government of Kenya purchased all of Telkom Kenya’s
holding in Safaricom and prepared the hot company for an IPO.43
IPO
Due to Safaricom’s “impressive profits”44 and “good financial performance” leading up to 2008, the
announcement of the government’s listing of 25% of its 60% piece of the company on the Nairobi Stock
Exchange ignited strong investor interest, both locally and internationally.45 Dyer & Blair Investment Bank in
Nairobi and Morgan Stanley in London were hired as lead transaction advisers for the issue, with Morgan
Stanley also serving as the global coordinator and book runner.46
In May 2008, a month before its expected listing on June 9, Safaricom had already attracted KES191 billion
from investors near and far, massively exceeding the treasury’s initial target of KES50 billion. The price set for
domestic investors was KES5, with foreign investors set to pay a premium international price of KES5.50 per
share. Even so, the secondary international market was receiving bids between KES6 and KES6.50 per share,
and the 10 billion shares on offer were massively oversubscribed.47
In what became one of sub-Saharan Africa’s biggest IPOs,48 Safaricom began trading as SAFCOM on the
Nairobi Stock Exchange on June 9. “During the course of the first day of trading [the 10 billion shares] leaped
by over 60% over the asking price, giving the firm a value of some [USD]4.5 billion.”49 As a result of its public
listing, the company’s ownership structure evolved overnight to one of 40% held by Vodafone, 35% held by
the Kenyan government, and 25% publicly owned.
A few weeks after IPO, “consistently poor performance” from Safaricom’s shares disappointed investors,
even occasionally hitting the “lowest share prices ever witnessed in that stock market.”50 The floating of too
many shares was seen as a contributing factor to the poor performance, and the situation was not helped by
the global economic crisis, which prompted many investors to offload “their shares out of panic.”51 For many
months after the initial excitement, the value of SAFCOM’s shares remained low. (See Exhibit 13a for
SAFCOM’s performance in its first six months of trading and Exhibit 13b for its percentage change in daily
price compared to the Nairobi index.)
42 Jack Ewing and Eliza Barclay, “Safaricom’s Big IPO In Africa,” Bloomberg, May 30, 2008, https://www.bloomberg.com/news/articles/2008-05-
30/safaricoms-big-ipo-in-africabusinessweek-business-news-stock-market-and-financial-advice (accessed May 22, 2018).
43 https://www.scribd.com/doc/7088318/Safaricom-Prospectus, 59.
44 Ingati, “Safaricom Limited,” 423–6.
45 Ingati, “Safaricom Limited,”423–6.
46 https://www.bloomberg.com/news/articles/2008-05-30/safaricoms-big-ipo-in-africabusinessweek-business-news-stock-market-and-financial-
advice.
47 Geoffrey Irungu, “Investors Set for Handsome Reward in SafariTrade,” Daily Monitor, May 9, 2008,
http://www.monitor.co.ug/Business/Commodities/688610-737300-ye7uv9z/index.html (accessed May 22, 2018).
48 Ingati, “Safaricom Limited,” 423–6.
49 https://www.economist.com/node/11525262.
50 Ingati, “Safaricom Limited,” 423–6.
51 Ingati, “Safaricom Limited,” 423–6.Page 7 UVA-F-1843
Despite its disappointing early stock market performance, one of the aspects of Safaricom that had
intrigued many early investors was its new mobile payments business, which had just launched in 2007 and
offered an exciting source of growth and an alternate stream of revenues for the otherwise traditional telecoms
player.
Payment transactions—a history
Simply put, a payment transaction moved cash from the purchaser of a good or service to the seller.
Historically, many payment transactions were as simple as a wagon loaded with gold (or some other tradeable
good) traveling from one city to another. Jacob Fugger, a wealthy Italian in the Middle Ages, was the first-
known banker with enough capital in his branches to use double-entry bookkeeping to complete “cashless”
transactions, wherein he debited an account in one branch and credited one in another.52 Over time, innovations
such as checks, credit cards, and debit cards accelerated the speed of transactions and made them more (though
not perfectly) secure.
Payment transactions—the Kenyan perspective
Unfortunately, many of these cashless solutions, which were popular in the developed world and relied on
heavy bank penetration, had no utility for most Kenyans trying to transfer money or pay for goods in the first
decade of the 21st century. Kenya, like much of sub-Saharan Africa, was notorious for being underbanked (i.e.,
banking services were not widespread). In fact, in 2007, over 80% of Kenyans were excluded from the formal
financial sector, lacking even a basic bank account.53
This lack of bank access in the first decade of the 21st century was a huge problem for a country where
more than a quarter of its population (usually rural women) relied on remittances for income.54 In 75% of
remittance cases in 2007, urban Kenyans who wanted to support relatives back home had to rely on informal
cash transfers through family members or public transport, thus facing a high risk of disappearing or stolen
cash.55
To avoid these risks associated with cash, a small number of Kenyans chose the alternative of purchasing
money transfers at the bank, but the transfers of this sort came at a cost and took several days (while also
requiring that both sender and receiver had easy access to a nearby bank).56 For Kenyans living abroad who
wanted to transfer money home in the absence of a bank account, options were limited to “companies such as
Western Union and MoneyGram.”57 These companies were popular on a global scale, and “remittances sent
from nearly 200 million migrant workers to developing countries totaled [GBP]102 billion” in 2006.58 These
payments, however, assumed both sender and receiver had access to an agent affiliated with the transfer
company, and as of 2015, MoneyGram payments could only be initiated in the United States. To avoid their
often steep fees, MoneyGram and Western Union customers could make transfers online or using a mobile
52 Greg Steinmetz, The Richest Man Who Ever Lived: The Life and Times of Jacob Fugger (New York: Simon & Schuster, Inc., 2015), 70.
53 Xan Rice, “Kenya Sets World First with Money Transfers by Mobile,” Guardian, March 20, 2007,
https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones (accessed Mar. 1, 2018).
54 Lucy Corkin, “Kenya’s Mobile Money Story and the Runaway Success of M-Pesa,” Observer Research Foundation, September 3, 2016,
http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/ (accessed Mar. 13, 2018).
55 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
56 Tina Rosenberg, “In Kenya, Phones Replace Bank Tellers,” New York Times, May 9, 2017, https://www.nytimes.com/2017/05/09/opinion/in-
kenya-phones-replace-bank-tellers.html (accessed Mar. 1, 2018).
57 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.
58 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.Page 8 UVA-F-1843
app, but this discounted option relied on either internet or smartphone access.59 While only a sliver of Kenyans
had bank accounts in 2007, 54% of adult Kenyans owned (or had access to) a basic mobile phone: there was a
clear need in the market for something better.60
M-Pesa
Far from these financial challenges specific to the developing world, Vodafone UK started to develop a
mobile-phone-facilitated payment offering in 2005. This novel system, which was Vodafone’s “brainchild,”61
was “originally designed as a system to allow micro-finance loan repayments to be made by phone.”62 Hoping
to pilot the system in Kenya, Vodafone entered a partnership deal with Safaricom, and its initial pilot phase was
jointly funded by both Vodafone and the UK Department for International Development63 “in an attempt to
facilitate financial access for micro-lenders and their clients.”64 An early win for the concept came when the
Kenyan regulator decided “to allow the scheme to proceed on an experimental basis, without formal
approval.”65
Safaricom officially launched the loan-repayments pilot in October 2005, dubbing the service M-Pesa (pesa
meaning “money” in Swahili). Soon after launch, however, “pilot studies revealed that the application was in
fact being used for general money transfers, and the application was redesigned”66 and “broadened to become
a general money-transfer scheme.”67
Following this redesign, Safaricom officially launched its M-Pesa service in March 2007, “essentially
ushering in a new era in the financial and money transfer industries.”68 The new M-Pesa system allowed users
to:
1. Make deposits into and withdrawals from virtual accounts on their phones, with a maximum allowable
balance of KES50,000.69 Joseph described the service as “effectively giving people ATM cards without
them ever having to open a real bank account.”70
2. Send money to others by giving cash “to a registered agent…who credit[ed the] virtual account.” Users
could then send “between [KES]100 and [KES]35,000 via text message” to a recipient, who cashed
the transfer at an agent “by entering a secret code and showing ID…A commission of up to [KES]170
[was] paid by the recipient [deducted directly from the user’s M-Pesa account71], but it compare[d]
favorably to the fees levied by major banks.”72
59 Carol M. Kopp, “Sending Money: MoneyGram vs. Western Union,” Investopedia, August 17, 2015,
https://www.investopedia.com/articles/personal-finance/081715/sending-money-moneygram-vs-western-union.asp (accessed May 9, 2018).
60 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.
61 Ingati, “Safaricom Limited,” 423–6.
62 T. S., “Why Does Kenya Lead The World in Mobile Money?,” Economist, March 2, 2015, https://www.economist.com/blogs/economist-
explains/2013/05/economist-explains-18 (accessed Mar. 1, 2018).
63 Ingati, “Safaricom Limited,” 423–6.
64 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
65 https://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18.
66 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
67 https://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18.
68 Ingati, “Safaricom Limited,” 423–6.
69 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.
70 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.
71 https://www.scribd.com/doc/7088318/Safaricom-Prospectus, 62.
72 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.Page 9 UVA-F-1843
Integral to driving usage of the accounts were the registered M-Pesa agents, who included restaurants,
microfinance institutions, supermarkets, hardware shops, and banks, where customers could deposit money or
withdraw money from their M-Pesa accounts using cash.73 Under the terms of the agreements entered into with
these agents, they were paid fees and incentivized based on a number of criteria, including the number and
value of M-Pesa transactions they carried out.74
The ability to send money through M-Pesa was limited to Safaricom network subscribers, but subscribers
of other networks could receive money through text messages.75 At launch, there were some concerns about
security, but Safaricom insisted “even if someone’s phone [was] stolen, the PIN system prevent[ed]
unauthorized withdrawals…The only danger [was] sending cash to the wrong mobile number and the recipient
redeeming it straight away.”76
Some journalists claimed that the implementation of M-Pesa “made Kenya the first country in the world
to adopt such a service,”77 while others claimed that two different companies, Globe Telecom and Smart
Communications, were also “operating money transfers in the Philippines since around 2005,” so the “world’s
first” was a slightly difficult accolade to assign.78 Regardless, the success of Safaricom’s M-Pesa certainly became
the most extraordinary. In its first two weeks alone, 10,000 people had signed up for the service.79
One tragic event that turned out to be helpful to the service early on was the “post-election violence in the
country in early 2008. M-Pesa was used to transfer money to people trapped in Nairobi’s slums at the time, and
some Kenyans regarded M-Pesa as a safer place to store their money than the banks, which were entangled in
ethnic disputes.”80 Journalists also noted the benefit of the “network effects: the more people who used it, the
more it made sense for others to sign up.”81
Initially, the M-Pesa concept targeted individuals lacking adequate access to bank accounts and
individuals whose incomes were insufficient to operate bank accounts. However, the M-Pesa
experience generated so much interest among the Kenyan population that it penetrated all class levels
in society and was no longer perceived to be merely a financial transactions channel for low income
people.82
M-Pesa abroad
With its early domestic success in Kenya, M-Pesa embarked on an ensuing period of international
expansion, starting with Tanzania in 2008, but many spectators were unimpressed by the concept’s less
spectacular success abroad83 and wondered why the M-Pesa “effect [wasn’t] hitting more countries.”84 (See
Exhibit 14 for a timeline of M-Pesa entering other countries.) One journalist observed that “the product was
73 Ingati, “Safaricom Limited,” 423–6.
74 https://www.scribd.com/doc/7088318/Safaricom-Prospectus.
75 Ingati, “Safaricom Limited,” 423–6.
76 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.
77 Ingati, “Safaricom Limited,” 423–6.
78 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.
79 https://www.theguardian.com/money/2007/mar/20/kenya.mobilephones.
80 https://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18.
81 https://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18.
82 Ingati, “Safaricom Limited,” 423–6.
83 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
84 Anna Leach, “Mobile Money: Why Isn’t the M-Pesa Effect Hitting More Countries?,” Guardian, April 16, 2015,
https://www.theguardian.com/global-development-professionals-network/2015/apr/16/mobile-money-m-pesa-india-kenya-development (accessed
Mar. 1, 2018).Page 10 UVA-F-1843
launched with gay abandon in several other countries such as Tanzania, DRC, Uganda, and South Africa,”85
but felt M-Pesa’s success did not translate “because the company [did] not take the time to understand the
structural nuances and social norms that inform the context of the formally unbanked in these countries.”86
M-Pesa’s 2010 expansion into South Africa was particularly embarrassing as Safaricom was “lured by South
Africa’s conservatively estimated USD20 billion informal market…After struggling for six years, M-Pesa
withdrew from South Africa in June 2016, having only a million registered users, well under one tenth of which
were active.”87 Journalists later speculated that M-Pesa failed in South Africa due to the country’s advanced and
widely accessible banking system, which provided three-quarters of adults with bank accounts. Within the
country’s vast array of banking options, the bank that M-Pesa partnered with (Nedbank) had a perception of
catering to middle-class and high-income earners, who already had a selection of banking services and platforms
available and thus were less enthusiastic about the uses for M-Pesa.88
M-Pesa’s domestic evolution
On the domestic front, M-Pesa’s star could not have been brighter, and Safaricom continued to diversify
M-Pesa’s offerings. (See Exhibit 15 for key M-Pesa dates.) New M-Pesa offerings that cropped up after the
service’s launch included an ability to pay electric bills via M-Pesa (in 2009), transfer money to an international
prepaid VISA credit card (in 2011), and make cashless payments to merchants using Lipa Na M-Pesa, meaning
“Pay with M-Pesa” in Swahili (in 2013). In 2012, the same year that “M-Pesa processed transactions amounting
to 31% of [Kenya’s] GDP,”89 Safaricom launched M-Shwari, allowing M-Pesa account holders to open an
interest-earning savings account via their mobile phones.90 This move brought many Kenyans into the formal
banking system, offering them insured deposits that were held by the Commercial Bank of Africa.91 In its first
three years of operation, M-Shwari acquired 12 million customers, most of whom had no other bank account.92
Because mobile network operators could track the transaction histories of mobile money accounts, they
were able to create a credit profile, allowing M-Shwari to offer short-term loans to customers. “The fact that
M-Shwari [had] a non-payment rate of [2%] over 90 days [in 2016], despite lending to a segment of the
population considered highly risky by conventional banks, [was] testament to the product’s success,” one
journalist noted.93 By 2013, 67% of adults in Kenya had some kind of access to financial services, in large part
thanks to M-Pesa.94
In 2014, M-Pesa (which was still taking a fee for each transaction it processed, ranging from KES3 for
small payments to KES100 for bigger transfers)95 decided to review its tariffs in the face of competition.96 As
85 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
86 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
87 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
88 Lerato Mbele, “Why M-Pesa Failed in South Africa,” BBC News, May 11, 2016, http://www.bbc.com/news/world-africa-36260348 (accessed May
6, 2018).
89 Murithi Mutiga, “Kenya’s Banking Revolution Lights a Fire,” New York Times, January 20, 2014,
https://www.nytimes.com/2014/01/21/opinion/kenyas-banking-revolution-lights-a-fire.html (accessed Mar. 1, 2018).
90 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
91 https://www.nytimes.com/2017/05/09/opinion/in-kenya-phones-replace-bank-tellers.html.
92 https://www.nytimes.com/2017/05/09/opinion/in-kenya-phones-replace-bank-tellers.html.
93 http://www.orfonline.org/expert-speaks/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
94 Murithi Mutiga and Zoe Flood, “Africa Calling: Mobile Phone Revolution to Transform Democracies,” Guardian, August 8, 2016,
https://www.theguardian.com/world/2016/aug/08/africa-calling-mobile-phone-broadband-revolution-transform-democracies (accessed Mar. 1,
2018).
95 https://www.bloomberg.com/news/articles/2013-01-09/vodafone-africa-becomes-profit-machine.
96 Matina Stevis, “Kenya’s Safaricom to Slash M-Pesa Transaction Fees,” Wall Street Journal, August 19, 2014,
https://blogs.wsj.com/frontiers/2014/08/19/kenyas-safaricom-to-slash-m-pesa-transaction-fees/ (accessed Mar. 11, 2018).Page 11 UVA-F-1843
such, it announced that it was drastically cutting fees for smaller transactions97 (up to KES1,500), and capping
fees for sums above that at 0.8% of the value.
M-Pesa’s competitive threats
Alongside these tariff readjustments, competition was growing in the mobile money space in Kenya. In
2015, Equity Bank entered the Kenyan mobile money segment,98 and by 2017, Safaricom’s market share
appeared to be impacted by the new service, branded Equitel. (For a competitive split of mobile money
subscribers in Kenya, see Exhibit 16.) Equity Bank was focused on its existing banking customers, which
totaled over 10 million by 2018.99 In addition to Equitel’s product, the Kenya Bankers Association, which
represented 46 banks, announced in 2017 that it was planning to introduce a mobile payment platform of its
own that allowed transfers between accounts at different banks.100 The CEO of the association, Habil Olaka,
felt that customers would “mov[e] over and prefer to use [the new] product,” while analyst Aly-Khan Satchu
of Rich Management thought competitors to M-Pesa would struggle. M-Pesa was “ubiquitous” and
“everywhere,” he said.101
To combat the pervasiveness of M-Pesa, the Association’s platform was targeting payments that exceeded
M-Pesa’s maximum transaction value of KES70,000 (USD675), while Safaricom CEO Robert Collymore was
happy to stay focused on micropayments. “We target the one shilling,” he said.102
By 2016, 7 in 10 adults in Kenya used M-Pesa, making nine million transactions daily103 and six billion
transactions throughout the year.104 Businesses and government agencies were using it as an alternative to cash
(with the option to pay salaries through the system), and by 2017, the number of active customers continued
to increase.105 (See Exhibit 17 for customer and active customer growth; see Exhibit 18 for M-Pesa revenue
growth; see Exhibit 19 for M-Pesa agent growth; and see Exhibit 20 for a breakdown of M-Pesa transactions
by type.)
M-Pesa’s future
In recent years, the smartphone was becoming more popular in Kenya, but most phones in use in Kenya
were still basic USD25 models.106 Looking ahead, Safaricom wanted to develop a new mobile app for future
smartphone adoption, in addition to building on its merchant-pay system, 1 Tap.107 1 Tap, which was rolled
out in Nairobi, Mombasa, and three other smaller cities in 2017, was an improved, one-step way for customers
to pay merchants. The system required customers to have a sticker on their phones that they then swiped on
the merchant’s reader. “Convenience and the little time needed to complete the transaction [were] likely…to
boost adoption of the system on the customer side,” several analysts believed.108 (The existing Lipa Na M-Pesa
97 https://blogs.wsj.com/frontiers/2014/08/19/kenyas-safaricom-to-slash-m-pesa-transaction-fees/.
98 Maureen Kirigua, “Safaricom—Initiation of Coverage,” African Alliance Capital Markets, January 26, 2018, 1.
99 Kirigua, “Safaricom—Initiation of Coverage,” 1.
100 Kieron Monks, “M-Pesa: Kenya’s Mobile Money Success Story Turns 10,” CNN, February 24, 2017,
https://www.cnn.com/2017/02/21/africa/mpesa-10th-anniversary/index.html (accessed Mar. 1, 2018).
101 https://www.cnn.com/2017/02/21/africa/mpesa-10th-anniversary/index.html.
102 https://www.cnn.com/2017/02/21/africa/mpesa-10th-anniversary/index.html.
103 https://www.theguardian.com/world/2016/aug/08/africa-calling-mobile-phone-broadband-revolution-transform-democracies.
104 https://www.cnn.com/2017/02/21/africa/mpesa-10th-anniversary/index.html.
105 https://www.theguardian.com/world/2016/aug/08/africa-calling-mobile-phone-broadband-revolution-transform-democracies.
106 https://www.nytimes.com/2017/05/09/opinion/in-kenya-phones-replace-bank-tellers.html.
107 https://www.cnn.com/2017/02/21/africa/mpesa-10th-anniversary/index.html.
108 Alexander Kazbegi, Amine Wafy, and Artem Yamschkov, “Safaricom: Could Sights Be Set Too Far in The Future?,” Renaissance Capital, October
25, 2017, 8.Page 12 UVA-F-1843
system, on the other hand, required a six-digit PIN in addition to multiple steps for consumers to pay
merchants.)
Many analysts were quite bullish on 1 Tap, including those from Renaissance Capital, who said, “We believe
the almost entirely cash-based economy provides a positive backdrop for an easy-to-use payment system to
take root: we believe SAFCOM’s 1 Tap merchant system, due to be rolled out in Fiscal 2H18, has a strong
chance of taking similar market share to M-Pesa in payments.”109
Alongside this new merchant-pay system, Safaricom also launched its own e-commerce platform, Masoko,
in November 2017.110 That year, Kenya’s e-commerce market was estimated to be less than 1% of retail
turnover in the country, compared to almost 9% globally, but the impediments to e-commerce adoption and
low PC and smartphone penetration were expected to change.111 Furthermore, Kenya’s young, tech-savvy
population was likely to drive a future growth in e-commerce.112 Through the Masoko system, merchants were
listed for free, with Safaricom cashing in on a percentage of the gross value of products sold through the
platform.113
M-Pesa imitators
After M-Pesa’s launch, “similar money transfer platforms [were] adopted in many other countries where
people [didn’t] have formal bank accounts.” Services took off in India, where the leading mobile-money firm
had 75 million subscribers in 2014, and others became popular in Tanzania and Afghanistan.114 By 2017,
100 countries had mobile money, but M-Pesa was described as “by far the most successful scheme of its type
on earth.”115 This success in Kenya was trailed closely by nearby countries, as “sub-Saharan Africa [was] a global
leader in the use of mobile money technology.”116 Many of these technologies were more rudimentary than the
popular American solution of Venmo, which relied on bank accounts and smartphone use for all users.
Safaricom—Telecoms Unit
By 2017, analysts argued that “Safaricom comprise[d] two businesses: telecom and mobile payments,”117
largely due to the sizeable contributions M-Pesa made to the company’s overall revenues. (See Exhibit 21 for
percentage of Safaricom group sales coming from M-Pesa.) This contribution from payments made Safaricom
an anomaly in the telecommunications space, as there were “only a few examples worldwide of financial services
revenue making such a strong—above 20%—contribution to a telco’s consolidated financials: MTN Uganda,
Vodacom Tanzania, and just a handful of others.”118 Despite the extensive excitement around the past success
of M-Pesa, Rubin wanted to be sure he understood the financial strength and prospects for the business as a
whole. (See Exhibit 22 for Safaricom’s balance sheet and Exhibit 23 for Safaricom’s income statement
covering the past five years.)
109 Kazbegi, Wafy, and Yamschkov, “Safaricom: Could Sights Be Set Too Far in The Future?,” 1.
110 Kirigua, “Safaricom—Initiation of Coverage,” 7.
111 Kazbegi, Wafy, and Yamschkov, “Safaricom: Could Sights Be Set Too Far in The Future?,” 9.
112 Kirigua, “Safaricom—Initiation of Coverage,” 7.
113 Kirigua, “Safaricom—Initiation of Coverage,” 7.
114 https://www.nytimes.com/2014/01/21/opinion/kenyas-banking-revolution-lights-a-fire.html.
115 https://www.economist.com/blogs/economist-explains/2013/05/economist-explains-18.
116 https://www.orfonline.org/expert-speak/kenyas-mobile-money-story-and-the-runaway-success-of-m-pesa/.
117 Louise Pillay, “Safaricom Ltd: Differentiated Growth Story,” Barclays Equity Research, May 15, 2017, 1.
118 Kazbegi, Wafy, and Yamschkov, “Safaricom: Could Sights Be Set Too Far in The Future?,” 2.Page 13 UVA-F-1843
In 2018, Safaricom remained a single-market telecom operator offering services in Kenya, but its
dominance in the country was unmatched. The company’s “network quality and coverage remain[ed] much
ahead of competition,”119 and Safaricom enjoyed 71% of market share in terms of subscribers120 as recently as
2016. (See Exhibit 24 for Kenya wireless subscriber market share.) As the company focused on diversifying its
revenue pool beyond voice services alone, revenues from Mobile Broadband and Fixed Data Services were
increasing in recent years.121 (See Exhibit 25 for service revenue split between 2010 and 2017.)
Due to the company’s strong position in the telecommunications space, there was some concern around
the government changing its regulatory position on Safaricom. In 2015, the Communications Authority of
Kenya (the telecoms regulator) had commissioned a dominance study looking at “anti-competitive behavior in
the telecoms market in Kenya,”122 and in February 2017, the consulting firm hired to examine the matter
(Analysys Mason) released its recommendations to separate M-Pesa from Safaricom, thus alarming the market
and driving the share price down.123
Several months after the released recommendations, however, fears around a separation of M-Pesa from
Safaricom were mostly allayed. Many research analysts felt that other stakeholders or regulators would take a
softer stance than what the telecoms regulator was advised to do.124 Furthermore, the Kenyan government’s
35% ownership of Safaricom and the latter’s contribution to the government budget were seen as reasons the
government would choose not to disrupt Safaricom’s businesses.125
As such, many analysts believed the telecoms market, and Safaricom’s position within it, looked poised to
grow after 2018. The Kenyan mobile market was attractive, with low data penetration126 alongside increasing
usage of smartphones and over-the-top apps such as WhatsApp.127 In 2017, one analyst commented that the
Kenyan “data opportunity was [just] beginning to be tapped, [and Safaricom had] the market leading data
network over all technologies,” meaning Safaricom would best benefit from the growth.128 This was helped by
the fact that, in 2018, internet usage in Kenya was predominately accessed through mobile data, with just 1%
of internet subscription accessed through wireless and fixed broadband.129
Ownership Structure
The structure of the company’s ownership presented an important set of decisions regarding the
investment strategy for Rubin’s fund.
Though long benefitting from 40% ownership by Vodafone, in May 2017, Vodafone transferred 35% of
its 40% stake in Safaricom to Vodacom in exchange for 226.8 million new ordinary Vodacom shares. The
transaction increased Vodafone’s ownership in Vodacom to 70% from 65% and streamlined and simplified the
119 Madhvendra Singh and Polina Uryumova, “Safaricom 1st Take: Key Takeaways from FY17 Conference Call,” Morgan Stanley Research, May 10,
2017.
120 Nic Fildes and John Aglionby, “Vodafone Transfers Stake in Kenya Operator Safaricom to Vodacom,” Financial Times, May 15, 2017,
https://www.ft.com/content/bbbb386e-3956-11e7-ac89-b01cc67cfeec (accessed Mar. 1, 2018).
121 Pillay, “Safaricom Ltd: Differentiated Growth Story,” 3.
122 Singh and Ugryumova, “Safaricom—Higher Risk Perception Price In,” 3.
123 Kazbegi, Wafy, and Yamschkov, “Safaricom: Could Sights Be Set Too Far in The Future?,” 2.
124 Singh and Ugryumova, “Safaricom—Higher Risk Perception Price In,” 5.
125 Singh and Ugryumova, “Safaricom—Higher Risk Perception Price In,” 6.
126 Chris Grundberg, “Safaricom—Compelling Core, Change in Ownership Offers Optionality,” UBS, August 10, 2017, 2.
127 Chris Grundberg, “Safaricom UBS Evidence Lab: Surveying the Savannah,” UBS Global Research, November 24, 2017, 11.
128 Singh and Ugryumova, “Safaricom—Higher Risk Perception Price In,” 3.
129 Kirigua, “Safaricom—Initiation of Coverage,” 8.Page 14 UVA-F-1843
management of Vodafone’s sub-Saharan Africa holdings. Vodafone also argued that the transfer strengthened
the cooperation between Safaricom and Vodacom, thereby enhancing the investment case for Vodacom
through exposure to the attractive Kenyan market.130
Indeed, by 2018, Vodacom had grown to become Vodafone’s biggest African business, so much so that in
2010, Vodacom surpassed the UK unit in terms of profits.131 In 2018, Vodacom operated networks in over
30 African countries, and controlled all of Vodafone’s assets on the continent, with the exception of two
Vodafone-controlled assets in Ghana and Egypt. Even after Vodafone dropped to 5% ownership in Safaricom,
it still maintained a board seat.132 Several analysts felt the ownership transfer provided “opportunities for
Safaricom to potentially leverage the skills Vodacom [had] developed around mobile data pricing and bundling,
where Vodacom [was] further down the journey of user adoption.”133
The new ownership structure implied three ways to get exposure to Safaricom, most directly through the
Nairobi Stock Exchange. Safaricom was the only telecom company listed on the Kenyan exchange and often
one of the most traded securities on the exchange. By 2018, Safaricom had grown to become the second-largest
stock by market cap in sub-Saharan Africa (after Dangote Cement), and “it was a highly favored stock among
frontier market investors.”134 Alternatively, investors could get limited exposure to Safaricom indirectly by
either investing in Vodafone on the London Stock Exchange or as an American depository receipt (ADR) on
the NASDAQ.
Approaches to Safaricom Valuation
As Rubin grappled with these exposure options, he examined the recent share price performance for both
Safaricom and Vodafone (see Exhibit 26) before turning his attention to an accurate valuation for the Kenyan
company. Due to the duality of Safaricom’s operations, many analysts treated Safaricom “as a mixture of two
distinct, albeit inter-related business—a telecom one and a fintech/payment/credit card-like one,”135 which
offered “lower margin, lower capex intensity, and higher growth”136 than the telecom unit.
Safaricom was expected to release its next full-year financial results in May 2018, but for valuation purposes,
Rubin had the March 2017 full-year results to employ. (See Exhibit 27 for Safaricom valuation metrics and
Exhibit 28 for a peer-based valuation summary.)
Conclusion
As Rubin reviewed the recent performance of Safaricom and its potential for growth, he wondered if the
Kenyan company offered the best opportunity for growing his fund’s portfolio. Rubin and his partner began
raising capital for their hedge fund in 2012, launching it that year with USD1 billion under management, and
by 2017, they had grown that number to USD1.6 billion. The fund’s investors were institutional investors and
high-net-worth individuals who could afford the USD5 million minimum investment, and the fund received
130 “Vodafone Transfers a 35% Interest in Safaricom to Vodacom in Exchange for New Ordinary Shares in Vodacom,” Vodafone, May 15, 2017,
http://www.vodafone.com/content/index/media/vodafone-group-releases/2017/safaricom-share-transfer.html (accessed May 22, 2018).
131 https://www.bloomberg.com/news/articles/2013-01-09/vodafone-africa-becomes-profit-machine.
132 Nic Fildes and John Aglionby, “Vodafone Transfers Stake in Kenya Operator Safaricom to Vodacom,” Financial Times, May 15, 2017,
https://www.ft.com/content/bbbb386e-3956-11e7-ac89-b01cc67cfeec (accessed Mar. 1, 2018).
133 Grundberg, “Safaricom—Compelling Core, Change in Ownership Offers Optionality,” 1.
134 Kazbegi, Wafy, and Yamschkov, “Safaricom: Could Sights Be Set Too Far in The Future?,” 2.
135 Kazbegi, Wafy, and Yamschkov, “Safaricom: Could Sights Be Set Too Far in The Future?,” 3.
136 Grundberg, “Safaricom UBS Evidence Lab: Surveying the Savannah,” 1.You can also read
