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Safaricom is a Kenya-based telecom and financial services company. Greg Rubin, a hedge fund manager, is looking into investing in the Kenyan company. This case study allows students to examine and evaluate Safaricom.
Yiorgos Allayannis and Jenny Craddock
Harvard Business Review (UV7480-PDF-ENG)
June 21, 2018
Case questions answered:
- Has the business model of Safaricom changed significantly in the time period covered by the case? If so does this change in operations impact assumptions used in firm valuation?
- What are the key risks surrounding the firm? How does the group propose to account for the risks in the valuation process?
- What are potential problems surrounding the service/technology of Safaricom, if any?
- As alluded to above, when valuing the firm it is very important to consider the country as well. Does the firm serve to some extent a humanitarian/social role? If so does this matter?
- Should Mr. Rubin make the investment into the company?
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Case answers for Safaricom 2018: The Emerging-Markets Payments Battle
This case solution includes an Excel file with calculations.
Has the business model of Safaricom changed significantly in the time period covered by the case? If so does this change in operations impact assumptions used in firm valuation?
Safaricom, now a $2.4 billion public company, was once a mobile phone organization in Kenya exclusively controlled by the Kenyan government’s Kenya Post and the Telecommunications Corporation (KPTC). During the 1990s, the company was a provider of analog mobile technology, which supplied basic cell phones and service to a modest portion of the population.
Safaricom was launched in 1993 by Kenya Post and Telecommunications Corporation (KPTC) as a monopolistic network provider for mobile telephones. However, Safaricom was not in high demand by Kenyans due to high costs.
In 1999, the company formed its own entity and got a license to operate in mobile communications, which caught the eye of Vodafone and Telkom Kenya Limited, formerly a part of KPTC, which acquired Safaricom at 40% and 60% respectively. During the acquisition, Safaricom focused on becoming a Kenyan brand by using colors from the Kenyan flag and advertising in Swahili. However, Kenyans faced the issue of sending payments from abroad since over 80% of Kenyans lacked a bank account.
54% of Kenyans had a mobile phone, which opened the opportunity for Safaricom to adopt the M-Pesa technology, which allowed mobile subscribers to pay for certain services, including the pre-payment of their phone bills and facilitate money transfers via a mobile device. The implementation of M-Pesa increased Safaricom’s subscription base from 15,000 to 8MM customers.
In 2007, Safaricom was the first company to be able to use 3G in Kenya, and the Kenyan Government bought the remaining 60% of the company that Vodafone did not own. Safaricom went to issue an IPO in October 2007, and 25% of the Government share was issued on the stock exchange. The price for domestic investors was 5.00 Kenyan Shillings and 5.50 for international investors. The price was driven up by investor demand and gave the company a 4.5 billion USD value. From 2008–2016, Safaricom entered into partnerships to provide additional services via M-Pesa to its subscriber base.
Eventually, mobile subscribers could use M-Pesa to pay bills such as rent and electricity, purchase goods and services, send and receive funds via wires, open bank accounts, and acquire loans. M-Pesa’s success led to increased transaction transfer time, reduced person-to-person transfer fees, and allowed for confirmation of information before sending and receiving funds.
To continue the growth of M-Pesa, Safaricom decided to expand into South Africa, but it failed because of South Africa’s’ strong banking system. The business model for the company changed in 2014 due to increased competition by decreasing their fees on smaller transactions.
In 2015, it was recommended that Safaricom and M-Pesa split due to the risk of the government changing regulations on Safaricom. However, the regulations did not proceed since the government-owned a 35% share in the company, and it would hurt their budget to regulate them further. While Safaricom started as a telecommunications organization, it emerged as a financial platform for many individuals and businesses, accounting for an estimated 70% of all financial transactions in 2016.
Safaricom is a dual-natured company within the telecommunications and financial services segment. This dual segmentation, combined with being a market leader in terms of innovation and resources, has allowed Safaricom to capture a significant market share causing tremendous growth and profits.
As of its 2017 financial statements, Safaricom has averaged a 14.47% growth rate in total revenues over the prior year, while increasing efficiencies through economies of the scale shown by increasing EBIT margin and profit margin. Using the company’s year-end financials for 2017, it was determined that the company’s stock price was $18.63, calculated by using its 2017 P/E Ratio and 2017 EPS. As of March 2018, Safaricom is trading at approx. $30.00 per share on the Nairobi Stock Exchange, a 60% return.
What are the key risks surrounding the firm? How does the group propose to account for the risks in the valuation process?
In 2017, a new service provider, Equitel, began to threaten Safaricom’s position.
Realizing the increase in competition and the need for growth, Vodafone transferred all but 5% of its share to Vodacom, a voice, messaging, and data provider. This enabled Safaricom to leverage Vodacom’s expertise in pricing and bundling.
Safaricom also transformed the organization by developing its merchant-pay system, 1 TAP, as well as an e-commerce platform, Masoko. 1 Tap was designed to make payments faster, and investors were bullish on the idea and believed it would take a similar share as M-Pesa.
Furthermore, Safaricom continued to…
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