The lifting of US sanctions saves the agreement with Safaricom in Ethiopia
A consortium led by Safaricom #ticker: SCOM received a boost after its US financier obtained special approval to fund the entry of telecoms operators into Ethiopia as part of US economic sanctions against Addis Ababa.
The expansion into Ethiopia had been complicated by the suspension of investment in the country by the American International Development Finance Corporation (DFC), despite its agreement to offer the consortium a loan of 500 million dollars (53.9 billion shillings ).
Safaricom revealed that the US state’s development financier had obtained approval to make selected investments in Ethiopia, including funding the group which includes Britain’s Vodafone and South Africa’s Vodacom Group Ltd.
The funding of 53.9 billion shillings had been called into question by US economic sanctions against Ethiopia to end violence in the northern Tigray region, a conflict that has killed thousands and displaced many other.
“DFC announced that it has requested and obtained approval to fund specific investments across Africa to support Africa,” said Peter Ndegwa, CEO of Safaricom.
“In particular, for Ethiopia, they had indicated that they would be interested in funding a consortium led through the Vodafone group, which is our consortium.”
Safaricom’s disclosure follows responses to analyst conference calls where the telecommunications company was asked how it plans to navigate US sanctions in reference to the DFC loan. There were concerns that DFC appeared poised to withdraw the loan offer for good, which could have forced the consortium to source cash elsewhere and at a higher cost.
The other partners in the consortium are the UK development finance agency CDC Group and the Japanese company Sumitomo Corporation.
It won the license with a bid of $ 850 million (91.6 billion shillings) and aims to start operations in Ethiopia next year.
Part of the license fee will be paid through debt, which will represent a significant portion of the more than $ 8 billion (862 billion shillings) that the consortium will invest in Ethiopia over the next decade. The DFC loan provides the consortium with long-term financing on relatively favorable terms.
The international financier says its loans typically mature between five and 25 years, with repayment schedules set on a quarterly or semi-annual basis.
A grace period on principal repayment at the beginning of the loan term is also common. The interest rate is a “negotiated spread over the base cost of funds”. Long-term US government bonds currently have interest rates below 2%, which is a low base on which to price the DFC loan.
DFC, however, levies a series of special charges on its credit facilities, including upfront fees (to cover due diligence), origination (payable once on the first disbursement), commitment (an annual percentage over the undisbursed amount) and maintenance (an annual charge to cover loan monitoring costs).
Ethiopia’s granting of a new telecommunications license paves the way for the first-time opening of the market of more than 110 million people to international investors, a key element of Prime Minister Abiy Ahmed’s economic strategy .
The license was granted for an initial period of 15 years. Safaricom, the largest company in East Africa, has a majority stake in the consortium.
Another partnership led by Vodacom’s Johannesburg rival MTN Group Ltd and the Silk Road Fund, a Chinese state investment group, was turned down after a $ 600 million offer. Ethiopia still intends to sell two more licenses and has said it will invite a new round of offers from international carriers after some policy adjustments.
The government is also considering selling a minority stake in Ethio Telecom, the state monopoly. The transactions are part of the economic liberalization policies of a country which is perceived as presenting major growth opportunities.
Ethio Telecom achieved sales of $ 604 million (64.3 billion shillings) in the six months to the end of December 2020. Safaricom’s half-year sales through September stood at 118.4 billion. shillings.
A telecommunications monopoly, Ethio Telecom is considered the top prize because of its huge protected market. Its subscriber base of 50.7 million makes it the largest single-country customer base of any operator in Africa.
Players like Safaricom are attracted by the growth potential of this market, whose 110 million inhabitants allow the country to offer a penetration rate of 46%. In contrast, Kenya’s 52.2 million mobile phone subscribers give it a penetration rate of 118%.
Safaricom is betting that the Ethiopian market will open up further in the coming days to allow mobile money licensing.
Ethiopia has said it will allow mobile money licenses in about 12 months, a development that Ndegwa says will excite Safaricom.
“We hope this can be converted into law so that foreign operators, like us, can leverage mobile money. Mobile money was an important part of our business case when thinking about the opportunity in Ethiopia, ”said Mr. Ndegwa.
Besides the loan capital, Safaricom says that all the shareholders involved in the consortium are ready to inject money.