US sanction waiver saves Safaricom Ethiopia deal

US sanction
Safaricom chief executive Peter Ndegwa during the company’s launch of 5G. FILE PHOTO | NMG

(Business Daily) — A consortium led by Safaricom  has received a boost after their US financier was granted a special approval to fund the telcos’ entry into Ethiopia amid America’s economic sanctions against Addis Ababa.

The Ethiopia expansion had been complicated by the US International Development Finance Corporation (DFC) pausing of investments in the country despite agreeing to offer the consortium a $500 million loan (Sh53.9 billion).

Safaricom has disclosed that the US State development financier was granted approval to make select investments in Ethiopia, including funding the group that includes UK’s Vodafone and South Africa’s Vodacom Group Ltd.

The Sh53.9 billion financing had been thrown into doubt over US economic sanctions against Ethiopia to end violence in the northern Tigray region, a conflict which has killed thousands of people and displaced many more.

“The DFC announced that they had sought and had gotten approval for funding specific investments across Africa to support Africa,” said Peter Ndegwa, Safaricom chief executive.

“In particular, for Ethiopia, they had indicated that they would be interested in funding consortium lead through the Vodafone Group, which is our consortium.”

Safaricom’s disclosure followed responses to analysts’ conference calls where the telecoms firm was asked how it planned to navigate the US sanctions in reference to the DFC loan. There were fears that DFC looked set to withdraw the loan offer permanently, which could have forced the consortium to source the cash from elsewhere and at a higher cost.

Other partners in the consortium are British development finance agency CDC Group and Japan’s Sumitomo Corporation.

It won the licence with a bid of $850 million (Sh91.6 billion) and aims to start operations in Ethiopia next year.

Part of the licence fee will be paid using debt, which will account for a significant share of the more than $8 billion (Sh862 billion) the consortium will invest in Ethiopia over the next decade. The DFC loan offers the consortium long-term financing on relatively favourable terms.

The international financier says its loans typically mature between five and 25 years, with repayment schedules set on 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 of below two percent, setting a low base on which to price the DFC loan.

DFC, however, levies a series of special fees on its credit facilities, including upfront retainer (to cover due diligence), origination (payable once on first disbursement), commitment (an annual percentage on undisbursed amount) and maintenance (an annual charge to cover cost of monitoring the loan).

Ethiopia’s award of a new telecoms licence paves the way to open the market of more than 110 million people to international investors for the first time, a key part of Prime Minister Abiy Ahmed’s economic strategy.

The licence has been awarded for an initial period of 15 years. Safaricom, East Africa’s biggest company, owns a majority stake in the consortium.

Another partnership led by MTN Group Ltd, Vodacom’s Johannesburg rival, and the Silk Road Fund, a Chinese State investment group, was turned down after bidding $600 million. Ethiopia still intends to sell two more licences, and said it will invite a new round of offers from international carriers after some policy adjustments.

The government is also looking to sell a minority stake in Ethio Telecom, the State monopoly. The transactions are part of economic liberalisation policies by a country which is seen as presenting major growth opportunities.

Ethio Telecom had revenues of $604 million (Sh64.3 billion) in the six months to end of December 2020. Safaricom’s half-year sales to September stood at Sh118.4 billion.

A telecoms monopoly, Ethio Telecom is seen as the biggest prize due to its huge protected market. Its subscriber base of 50.7 million makes it the biggest single-country customer base of any operator in Africa.

Players like Safaricom are attracted by the growth potential in that market whose 110 million people means the country offers a penetration rate of 46 percent. By contrast, Kenya’s 52.2 million mobile phone subscribers gives it a penetration of 118 percent.

Safaricom is betting that the Ethiopian market will open up further in the coming days to allow for mobile money licence.

Ethiopia has indicated that it will allow mobile money licence in about 12 months time, a development Mr Ndegwa says will excite Safaricom.

“We hope that that can be converted into law so that foreign operators, like ourselves, can operate mobile money. Mobile money was an important part of our business case in thinking about the opportunity in Ethiopia,”said Mr Ndegwa.

Apart from debt capital, Safaricom says all the shareholders involved in the consortium are open to pump in money.

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