Safaricom PLC (VOD) Earnings Call Transcript & Summary

Good afternoon, everyone, and good morning to those joining from the U.S. My name is JP Davids, I look after Investor Relations for the Vodacom Group. Thank you for joining this call to discuss the acquisition of a strategic stake in Safaricom. As a reminder, we have put out an announcement this morning on the Johannesburg Stock Exchange alongside Safaricom. We've also published a presentation to our website, which is available at www.vodacom.com. And if you need that presentation, you can reach out to myself or the Investor Relations team. I'm pleased to say we're joined on today's call by both Vodacom and Safaricom management. On the Vodacom side, Shameel and Raisibe, who you know well. We also have Sean Bennett joining us. Sean is our Chief Officer of M&A and Business Development. From the Safaricom team, thanks to Peter, Dilip and Caroline for joining us. And with that, I'll hand over to Shameel for some opening remarks, and then we will move on to Q&A. Thank you.

Thank you. Thank you, everybody, for joining us. I think a very big day for us because we see this as a transformational investment for a number of reasons, given the context of Safaricom, the size, the trading and so on. And of course, the big fintech play and the fact that as Vodafone and Vodacom, we've invested for the last 25 years. So basically, what we've announced today is that we intending acquiring 15% shareholding from the government of Kenya and a 5% shareholding from Vodafone so that will give us 20%, the 20% will amount to $2.1 billion is the purchase price or equivalent to KES 34 per Safaricom share. This will increase our shareholding to 55% of Safaricom and give us the ability to consolidate. And this will, of course, be very complementary to our Vision 2030 strategy. Now the split in terms of how much we're paying is USD 0.5 billion or ZAR 500 million for the Vodafone USD or ZAR 9 billion for the for shares in the Vodafone's 5% or the way to held is 12.5% in Vodafone Kenya, but we'll buy the 12.5% that we don't own. And then we are on 100% of Vodafone Kenya going forward. The second part of the transaction is buying the 15% from government for an equivalent of USD 1.6 billion or ZAR 27 billion. And then we've also bought some of the future dividends and the remaining holding which is equivalent to about ZAR 7.4 billion of dividends for a purchase price of ZAR 5.3 billion. Now this will give us the ability to, as I said, to consolidate on Safaricom. It's an established player effectively, what the market share -- or sorry, what the ownership structure would look like post the transaction is 55%, us, 20% government, and 25% on the listed entity side. The EBITDA margin in Kenya is running at 57.3%. And for the group, because of the losses in Ethiopia 49.5%. So it's a very lucrative business. It's been growing double digit. So very good, also has 38 million M-Pesa customers in Kenya, and that's already constitutes 44% of revenues in Kenya. So this will give us the -- from a Vodacom perspective, the benefits are that it diversifies our portfolio more. If we look at it post-consolidation, we'll end up with 35% South Africa, 31% Safaricom and then 21% Egypt at about 13% from the international. So it gives us a very nice diversification also exposes you to 3 big markets, which is Kenya, Egypt and South Africa. And of course, it's one of the prized assets in Telco on the continent, but also global. Market leader with 65% market share in Kenya it's about 57% margin. It's got -- and of course, the revenue market share is even higher. It's got 90% of the fintech market. It's a leader in fiber, so fully-integrated portfolio of assets. It's got a lot of fiber to the sites. It owns most of its towers or almost all of it towers. I think a very strong portfolio, very strong positioning in the market. And also government staying on as a shareholder, we see as a positive, so that the public private listed investment that we've created, think is the reference point for how this can be done worldwide, has actually turned out to be very positive. And of course, both government, we've recommitted to government in terms of our undertakings and they've committed to us in terms of our partnership going forward and how we can create a mutually beneficial business and so how with the digitization of the country. So -- and then maybe just to add then, there's a fairness opinion that's been done. We're just waiting. It's a CP to the deal. It's been done by an independent expert, Deloitte, and we're just waiting for the final approval from the JSE. And I'll pause there for questions.

Super. Thanks, Shameel. We have a few coming through already. [Operator Instructions] Perhaps we'll kick off with one from Jonathan Kennedy-Good. And then another one for [ The Serbi ], which is the same question from Myron and Mike. So just starting with Jonathan's question, is there any lockup period for the remaining government's stake of 20%? Also do you have the first right of refusal? So that's the first question. Perhaps that's one for you, Shameel. And then the second one is just around the financing. Is the ZAR 35 billion of new debt incurred by Vodacom interest -- or sorry, is it tax deductible? Is the interest on it, tax deductible?

Okay. So the 20% is we don't have an offer on, one. And two is government doesn't intend selling it. I think selling the 15% was quite painful for them because they really see value in the asset and they really see it as a strategic investor. So they committed publicly even today in the press release, in the press conferences and so on that they want to hold on to the 20% for the foreseeable future because they see this model of bringing an investor, having government have a strategic stake in which is the biggest company in Kenya is a very important step for that.

And then in terms of tax deductibility of the interest, no, we are -- we have taken 10 facilities. And we wanted to make sure that first step, we closed the transaction and then start looking at opportunities of refinancing. This will be similar to what we have done previously when we did the Egypt transaction, where we did the preference structure subsequent to that first day. However, the terms of the funding are relatively the positive attractive as such that it doesn't create a lot of pressure for us to go and refinance the facilities. We were funded by Vodafone Luxembourg, which basically runs a treasury environment or a mini bank, and we are able to either refinance the whole package or part of the package and we have left that level of flexibility. The component that is in Kenya, which is a buying of the dividend stream that is also funded in Chile, and that is obviously going to be repaid from the dividend stream that comes through. Yes. So that is the outcome. And of course, preference shares will still be one of the preferred methods. We were also quite conscious that -- we were raising funding to close out on the fiber deal on massive transaction. So -- and for that reason, we wanted to separate the 2. So yes, we will explore opportunities. As it turns out, I'm getting a lot of e-mails from banks saying when you refinance, we are available. So we will do that in due course.

Thank you. Follow-on questions for the funding of the deal. The first 1 comes from [ Demasani ] at [ SPW ]. I would start by saying and quoting him, he says, looks like a master stroke of a deal, congrats guys. But his question on the funding is the $2.1 billion or a U.S. dollar facility or have you carved or perhaps Ethiopian to align with Safaricom's cash flows. If so, what does the mix look like? And just to confirm whether in that answer, you're talking about the Vodafone facility or the government dividend facility or the government upfront payment to the dividends. I think just related to that vessel that [ oystercatchers ] asking us just to talk through some of the high-level financing of parameters of the deal, things like interest cost, currencies, et cetera, you can probably tackle both of those with the same answer.

Okay. Thanks, JP. So the dividend facility, which is an equivalent of $500 million -- or $300 million. That is in cash in local currency and that is the facility that we got from one of the local banks and with a guarantee from Vodacom Group, and that will be settled as such in Kenya and Chile. . Then the component that acquires the 15% from the government and the 5% from Vodafone are both in ZAR funded by Vodafone Luxembourg delivered in rent on to us and settled in our currency. The government will receive in dollars and Vodafone will receive euro, but the funding that we will see in ZAR. And that is in a very similar company as the funding that we normally get from Luxembourg which is arriving at us price and everything already with the currency swaps and it is still fairly attractive in terms of pricing when you compare to what we get from the other financial institutions. And we always shop around. We never just take the first available capacity. But as I said, higher concentration with Luxembourg in fact because we are already raising some money in the market. But yes, I mean, we did negotiate hard. It is at arm's length and it is priced at an average of around 8% volume rate. So we're quite comfortable with that. And we will continue to explore opportunities, as I said earlier on and the opportunity that could probably match that practically will be the preferences.

Great. We have a couple of questions around the dividend aspect of the deal. The first one is from [ John Kim ], at [ Allan Gray ] and then Robert of Deutsche Bank is also asking around that perhaps there's an element of overlap to the 2 questions, but I'll just ask them separately. The first one from [ John Kim ], how is the value of the dividend stream calculated? Just to confirm, it's fixed ZAR 7.4 billion? Or is it rather related to all future dividends you're contemplating here? And then Robert's question is similar, is the ZAR 7.4 billion on the forward dividends based on a definitive or fixed time line? Or is it just still the 20% of the remaining government stake reaches that ZAR 7.4 billion. So perhaps just a little bit more color around how that particular transaction will work?

This is Shaun. So what we did is we took we took a percentage of sort of expected dividends over a 3-year period, and then we discounted it at an IRR of 16.5%. And the way it works is if those dividends are more than the percentage, and it will pay down the facility quicker, in which case the IRR will go up. However, we're capped at 18% IRR. So and we actually fully expect it to be paid down sort of just over 2 years in just over 2 years.

Well, thank you, Shaun. Perhaps switching to a couple of Preshendran's questions from 361. So he's got one here on the effective tax rate on the for the group given that the interest is not going to be tax deductible. I think Preshendran and that one is probably a little bit too specific for today's call. We're not giving pro forma numbers on this call. And I guess, with these types of things, we'll try to help a little bit more over time. Switching to questions from HSBC. A couple of questions. Firstly, what is this going to do to leverage for the group after this and the massive deal are contemplated together? And then I guess just a broader question around the path of the dividends or the outlook for the dividend. So specifically, is there any risk to the dividend here?

Okay. So the question being around leverage. So we are expecting to be a charge below 1.5x, which is our internal metric and this is after this transaction and after the MAZIV transaction, which we have paid already the ZAR 8 billion on the first of December. So our plan will be to delever as opportunities arise, and to continue and refinance as we go along. But yes, so the net debt-to-EBITDA metrics are still at a healthy 1.5x.

And then any comments you want to give on the dividend, Raisibe?

So we still maintain the dividend policy at Vodacom Group at 75%. Obviously, if there's any change or anything like that to consider. But at this point, we're quite comfortable that this is the level where we are. The dividend policy of Safaricom is 80%, and that is also no change at this stage. And yes, so if there are any changes or anything, we will come back to the market. But no plan to do that at this stage.

Okay. Maybe switching gear a little bit into some of the other questions that are coming through related to things outside of the structuring. So Robert's other question was just around -- probably more one for you, Shameel and perhaps the Safaricom team. But is there anything we plan on doing with Safaricom in terms of its strategy with regard to financial services or payments, i.e., how are we going to leverage Safaricom's expertise into the region and to the rest of our portfolio. That's question one. And then a separate question from Nadim at [indiscernible] bank. I was just asking about what the board structure will look like post the steel, if we can provide him a little bit of help there. And I guess more broadly, what strategic value do we see of having greater control of Safaricom. So how would this create shareholder value for, I guess, Vodacom and Safaricom?

Yes. So a couple of things. So firstly, I think -- so let's start with the last question. So I think from a strategic perspective, effectively from a Vodacom perspective, it helps us to diversify revenues and through the consolidation and have exposure to what's a very -- more exposure towards [indiscernible] asset, that's even combined, even what the Ethiopia losses is running at 49.5%,right given our margin. Now Kenya running at 57%. So once you start -- you get to even a couple even, which is projected to be next year for Ethiopia, you start to see that we're getting a lot better. So that's the one side. And then, of course, it's got strong earnings, strong growth, strong market positioning, strong assets, and so on both in fiber, fintech and as well. Where we see synergies, of course, is definitely procurement synergies. We see synergies in working even closer together. Remember, it is part of the group today. So it's not like we're buying an asset that we don't know. We've been part of creating the success for the last 25 years as Vodafone, Vodacom and essentially -- so we have deep insight into the business in lots of context. I think the further opportunities will come cost sharing -- so an example, 1 of the things that will happen immediately is the Chief Commercial Officer, joined the Board of MAZIV of Safaricom on to MAZIV. And the reason for that is that we want to cross-pollinate the fiber the ideas and opportunities. So we build year cheaper. But of course, we've got deeper experience having a bigger base in SA. So these are the type of things that we would leverage. And so that working together all the way from governance through to try to work in to get on commercial workday. And of course, we plan to continue to lean reach the financial services part. Remember, we've built M-Pesa in Kenya. So we'll still look leverage capabilities and skills of Safaricom, [indiscernible] was here last week looking at, for instance, the whole governance part in terms of M-Pesa. And we saw some good best practices that can be replicated in the other markets given the more mature basis of how long fintech and financial services have been around in Safaricom. So there's a lot of cross learnings cross ideas. We're working on products together everything from loyalty products to big data, we share people. So all of this will just become a lot tighter, and we think that will be to even more success as we go forward. So it will be beneficial. Remember, there's a shareholder transaction. But I think Safaricom will gain from it. And I think also just to put a perspective, we're more comfortable or we are comfortable with the regulatory framework and so on with the new licensing that we published for public comment and so on in the environment. So quite comfortable that we've got a good sustainable business going forward. In terms of the board structure, we, of course, the Vodafone, we have 1 Vodafone, 3 Vodacom. nIt will all become Vodacom. So you'll have 5 Vodacom directors. And then you'll have 2 governments, 4 independents and 1 exec, which is the CEO. It's a slight change from today, because basically, we'll take over one from government.

Thank you, Shameel. A question from Jonathan from [indiscernible]. Just around the shareholder structure for Ethiopia. And whether we see any changes there as a result of this deal. And then perhaps also just following up on the regulatory outstanding approvals. Perhaps we can just give a sense of what are some of the big ones from the conditions precedent that we require to get the scale over the line.

Will comment on all the approvals. On the Safaricom -- sorry, on Ethiopia shareholding, Safaricom owns about 53, we own just over 5. So that structure won't really change, except for if any of the partners want to want to change hands or so on. And so yes, it doesn't affect the structure per se. But we'll always make sure we've got the right partners to make sure that we fund the business and have the momentum going forward.

So on the sort of regulatory approvals, we've got -- there's quite a lot. There's the competition wants in relation to COMESA and the East African competition, I think. We've got the Capital Markets Authority have to sign off on the fact that we don't make an offer to minorities. We've got the Central Bank will need to approve from a dividend perspective, the Communications Authority. And then we've got the Reserve Bank in South Africa. So there's a reasonable amount. We're still waiting for the JSE approval in relation to the fairness opinion on the related party aspects of the transaction, although the work has been finished and they're just reviewing the report and that's expected in the next 24 hours.

Great. Reverting back to some questions on the financing side. [Indiscernible] from SCB, just asking around what sort of tenure the Luxembourg have? And Jonathan interested in the broader repayment terms of those facilities, i.e., are they amortizing or bullet payments? Maybe take those 2 and then there's a follow-up from the [ Demasani ], but I'll make you answer first.

Thank you. In terms of tenure, we have credit to allow that refinancing plan. So there's a portion -- small portion that is a 1-year bridge facility. And that is based on our scanning of the market where we know that we can be able to refinance that very quickly. And then the balance is spread between 3, 5 and 7 years. So that is with the capacity to refinance without kind of [ community ] charges. But obviously, we have to give a notice period. So if we get to that point. So that is -- that part, and then -- sorry, what was the second one again, JP?

So yes, that was just around the -- I think you've nailed both, so that's all good. But just moving on to Demesani's question, which is also related to this I think you just wanted to clarify in a scenario where we do refinance these facilities, would it be in local currency, i.e., Kenyan shillings, I guess Demesani's main point here is just worried about to what extent we would be taking on foreign exchange risk going forward. So he is interested in the thoughts around our approach to managing foreign exchange risk.

So when we refinance is still in ZAR, so our basic approach in terms of debt is in ZAR. And the only exceptions are in markets like DRC where it is a dollar economy. And obviously, that is serviced in the local environment or any other facilities that we have in any other market will be in local currency. Our facilities, our debt is concentrated in SA, and it is all in ZAR. So therefore, if we refinance when we refinance is also still going to be in ZAR. And just to be clear, the one that is in cash is the dividend loan, which is going to benefit from the dividend inflow that basically becomes a liquidity match with the loan that we have taken and that should be dispensed off very quickly. And there's no facility there because nothing in this transaction actually happens in Ethiopia. So it is between SA and Kenya with the smallest component being in Kenya and Chile. Otherwise, the balance of our facilities are in rand.

Okay. Shameel, I think you might like this well from [indiscernible]. He's saying Safaricom comes up 80% over the last 12 months. Why didn't you buy Vodafone's [ consent ] last year? Separate question from Pradumna from HSBC. I just wanted an update on if this transaction at all impacted that discussion around the separation of M-Pesa. I guess you've made some comments in the past, I just wanted to see if those have changed. I just want to keep if those have changed in any way.

Yes. So maybe let me start there. The minister came out today was asked the same question and he clearly stated that there's no splitting of M-Pesa. So I think that deals with that. In terms of the price, and just also to be clear, we've made commitments to government, they make commitments to us in terms of this transaction. And the other thing just on the Vodafone, why didn't we buy it at a lower price because honestly, they weren't that stupid to sell it to us at the low. Of course, we tried, but they weren't buying to. And I think here, what we managed to do is to get a good price. And I think also they've given us an attractive funding package. And -- but we've also -- the consolidation is -- sorry, being able to take 100% helps us a lot from a tax perspective because we're saving capital gains. Because basically, when we get the dividend, we use that to pay off the loan. [indiscernible].

A question perhaps for Shaun. And Shaun, I'd ask that you answer this as high level as humanly possible. Was asking around the rough sense of the transaction costs associated with the deal? And then a follow-up from Jonathan Kennedy-Good at Prescient. I think we've dealt with most of it, but let's just see a , which is if we are intending to refinance the Vodafone term loan with bank funding, how much would we consider refinancing?

So the transaction costs, they're relatively low for a transaction of this size. So in sort of a range of ZAR 200 million to ZAR 300 million. So it depends on -- we're not expecting stamp duty, in fact, so -- but it depends on whether you add that in just in case. So ZAR 200 million to ZAR 300 million is sort of a reasonable estimate.

That's a lot of it is stamp duty and brokerage.

Yes, there's various -- it's a block trade in Kenya. So there are various sort of fees that have to be paid, regulatory fees, et cetera. That's a large portion of that.

And then in terms of the refinance, the reason why we split it up in the 1-year bracket, 3 years, 5 this and 7 years is also to allow us that opportunity of when to -- how much to be financed at a point in time and also blended with our maturity profile of our other debt -- our other existing debt and the order of what to refinance is driven by a component of what is coming up for a renewal as well as what is more expensive. So this being that is nontax deductible, the preference will be to refinance it with the preference shares to the extent that capacity is still available. And you recall that we did a preference share recently for our MAZIV transaction. But in our packaging order, the 1-year facility is the one that we refinance first, and then it will depend on whether we are able to get 10 facilities, which are well priced to match the pricing that we have from Luxembourg or if we are able to put that into the structure.

Super. Thank you, Raisibe. Just as a reminder, we have put a presentation on to the website, the Vodacom website. And if you need access that and you can't find it through Investor Relations team. Shameel at this point, we do not have any further questions -- sorry, one has just come in, and then let's see if any more double than that. So this is from Rohit at Citi. Quick follow-up on the M-Pesa separation. So is there a commitment from the government and the regulator that this won't be forced on M-PESA in the future i.e., who's making this commitment?

I think there's a clear statement from government that there is no intention to split it.

Okay. And was that the question...

Just push split as well, yes.

So what are done. So happy to hand over to you to finish off that question and wrap up the call. Thank you.

Yes. So basically, the big part is that the government has come out clearly saying there's no intention to split it. So I think that's the big part in terms of it. And yes, so we're quite comfortable with that. I mean the noise levels of splitting have been around for as long as I've been involved. That's coming on 8 or 9 years now, and it hasn't happened. So I think we have a very good understanding with government and also government is a shareholder and also that the value that M-PESA brings both to the economy. But there isn't a basis for splitting. And remember, even if one day came to pass, we would still own -- you don't split and take the company away from us. We own both sides of the company, which actually we still hold our 55% stake in both. But we're not concerned that that's it. And thank you. Thank you for joining us. If you have any other questions, please reach out to JP. I'll be happy to have further discussions on it.

Question pop-in. Have you still got a second to answer it? Sure. We've got a question from M&G. Can you provide any clarity on the commitments made to the government and the commitments made by the government to you at this point in time?

Well, the government has kind of given some of it out already in the press release, and we haven't released anything. But it's still -- it's more around how we work together, essentially building on the commitments that we had before, just recommitting to each other how we run the business. I mean -- and then the standard stuff, like we won't change the brand, that is a commitment we've had for the last 10 years or even longer. And things like there won't be any retrenchments as a result of the transaction for the next 2 years, those type of 3 years, sorry. So they won't -- as a result of the transaction, except for in the normal course of business, those type of commitments and that we keep with the foundation's activities and won't stop the foundations as it relates to how it operates currently, which, by the way, is licensed that the interest money goes into a foundation and then that goes into social development and that will stay.

Super. Thank you, Shameel and thank you to everyone for dialing in. We will end the call there.