- The company’s debt increased 5.2 times from the previous year’s 14.7 billion shillings, making the telecommunications company one of the largest corporate borrowers.
- Safaricom noted that it held cash and cash equivalents of Sh 26.4 billion in the period under review, placing its net debt at Sh. 50.5 billion.
Safaricom #ticker: SCOM bank lending surged to a record Sh76.9 billion in the semester ended September, as the telecom company raised funds to pay for its Ethiopian license in addition to investing in its operations.
The company’s debt increased 5.2 times from the previous year’s 14.7 billion shillings, making the telecommunications company one of the largest corporate borrowers along with other companies such as KenGen, Kenya Airways and Kenya Power.
Safaricom noted that it held cash and cash equivalents of Sh 26.4 billion in the period under review, placing its net debt at Sh. 50.5 billion.
Early in its life as a publicly traded company, telco financed its growth through debt, but got rid of medium- and long-term debt as its cash generation outweighed its reinvestment needs.
The Ethiopian firm, however, requires major investments which will see Safaricom further increase its lending given its role as the main shareholder of the new business with a 55.7% stake.
From the loan of Sh76.9 billion, Sh62.2 billion is in the form of short-term debt. Safaricom says it will convert some of the short-term loans into long-term structures to manage currency risks and improve its working capital position.
“To support the payment of telecommunications license fees awarded to the consortium led by Safaricom by the government of Ethiopia, we have undertaken a one-year bridge facility of $ 400 million (Sh.44.8 billion) to finance this venture. “Safaricom said in a statement.
“We are currently looking to terminate the bridge structure through a long-term arrangement in order to manage our short-term working capital requirements and minimize the currency risk for the dollar loan.”
The consortium, which includes the South African group Vodacom, paid a total of $ 850 million (sh. 94.9 billion) for the license.
Safaricom said it is investing an initial $ 600 million (Sh67 billion) in Ethiopia as part of its contribution to the consortium’s total investment commitment of $ 8 billion (Sh894 billion) over 10 years not including license fees.
It remains to be seen whether telco will change its dividend policy due to the huge capital requirements in the Ethiopian firm.
Safaricom distributed at least 80 percent of its net income to shareholders, leaving the remaining 20 percent for reinvestment in infrastructure and retained earnings, which now amount to Sh.133.7 billion.
The telecommunications company could use retained earnings to partially finance its Ethiopian commitments.
Its parent company Vodacom Group has meanwhile told shareholders it will lower the dividend payment rate from 90% to 75% of ordinary income following its proposed acquisition of a 55% stake in Vodafone Egypt.
Safaricom says it will finance the Ethiopian investment through its own funds and loans from local banks and development finance institutions.
“We expect capital expenditure of between $ 1.5 billion (Sh167 billion) and $ 2 billion (Sh223 billion) over the next five years to meet license coverage obligations,” Safaricom chief executive Peter said. Ndegwa of the consortium’s initial investments in Ethiopia.
The need for telecom companies to borrow more long-term funds is likely to benefit local banks whose other large customers are blue-chip companies like East African Breweries Plc and state-owned companies like KenGen and Kenya Power.
Major borrowers offer banks the opportunity to make some large loans in local currency as well as dollars by diversifying their loan portfolios.
Major Equity-led banks, KCB and Co-op Bank have increased their ability to lend tens of billions of shillings to a single client.
Banks also leverage lending relationships to obtain deposits and other assets from their large clients, including forex offerings and advisory services.
However, most loans are expected to come from sovereign wealth funds and development finance institutions that have much deeper pockets and can lend for periods spanning more than a decade.
The consortium had requested a loan of $ 500 million (55.9 billion shillings) from the US International Development Finance Corporation (DFC).
The US state agency, however, delayed the disbursement of the funds, citing uncertainty about the ongoing riots in Ethiopia.
DFC says it is working closely with its partner agencies in the US government to monitor the situation and will carefully evaluate its impact on any potential funding from the consortium.
Safaricom says the investment in Ethiopia could pay off from the fifth year, but notes that violence in that country could lengthen the payback time.
“Together with our partners we have availed ourselves [sic] funding to support this new venture which we expect to break even within the fourth year of operation, “said Ndegwa.
“Our break-even target could be significantly impacted by the impact of the current conflict on the launch of the operations we aim for in mid-2022.”
Mr Ndegwa said Safaricom believes the opportunities in Ethiopia outweigh the risks. The telco sees the Ethiopian firm as a huge growth opportunity in a market of 110 million people and which previously relied solely on the state-owned Ethio Telecom.
Ethiopia recently announced that Safaricom will be allowed to offer mobile money services after Ethio Telecom, making its license more valuable.
The Ethiopian firm is set to slow Safaricom’s profit growth momentum over the medium term as the transaction’s significant cash flows in Kenya will be used to finance the new business. Once profitable, the Ethiopian subsidiary will boost the telco’s consolidated earnings.