ETHIOPIA – Vodacom Group has signed a deal that could see it buy an additional 10.9 percent stake in Safaricom Telecommunications Ethiopia from UK’s sovereign wealth fund CDC Group at a cost of US$1.74 billion in the coming years.
The deal, if completed, will raise Vodacom’s interest in the newly formed telco to 17.1 percent.
The South African telco currently owns a 6.2 percent stake in the Ethiopian firm through the Netherlands-registered investment vehicle Vodafamily Ethiopia Holding Company.
“As part of the transaction agreements, Vodacom has granted a put option on the shares held by the CDC Group in the holding company to facilitate CDC Group’s potential exit in the investment,” Vodacom said in a trading update.”
“CDC Group can only put the shares at fair market value (the total exposure of the put option is capped at US$1,740 million, representing 10 percent of Vodacom’s current market capitalization) from year 8 to year 10 from the year of commencement of commercial operations of the Ethiopia operating company.”
A put option is a contract that gives the buyer the right, but not the obligation, to sell a specified number of shares or other security at a predetermined price within a specific period and in this case, CDC got a guarantee that there will be a buyer for its stake in the future.
If the Ethiopia venture proves successful and there are suitors willing to pay larger sums, the UK sovereign wealth fund can sell to them and leave Vodacom to keep the premiums paid in the contract as profit.
If there are no other buyers, CDC will have the right to sell the stake to the South African multinational based on the fair market value and which will be capped at the set amount.
The deal signals Vodacom’s confidence that the Ethiopian operation will be successful, indicating that the telco could be worth as much as US$15.4 billion in a decade.
If Vodacom buys the CDC stake, it will have raised its exposure in Ethiopia by a large margin. The multinational also holds a 35 percent stake in Kenya’s Safaricom Plc –the majority shareholder in the Ethiopian business with a 55.7 percent equity.
The other shareholder in the venture is Japan’s conglomerate Sumitomo Corporation with a 27.2 percent stake. Vodafone Plc, which has stakes in Safaricom and Vodacom, has a nominal interest in the Ethiopian business.
The consortium members on September 10 signed agreements to fund the new venture.
“Vodacom’s commitment to fund Ethiopia Opco is limited to its pro-rata beneficial shareholding of 6.2 percent, which is not expected to be material,” the multinational said.
“Safaricom, as the lead member of the consortium, intends to provide additional disclosure on the funding of the Ethiopia operating company in the coming months. Vodacom will also provide strategic operational support for the Ethiopia operating company.”
The consortium won an operating licence and paid US$850 million to the Ethiopian government after beating a rival bid of US$600 million from a group led by South Africa-based MTN.
The Safaricom consortium also pledged to invest a total of US$8 billion over 10 years, including the cost of building telecoms infrastructure.
The big-ticket investment is expected to see the consortium borrow from institutional investors, including development finance firms.
The parties see the deal as presenting a huge growth opportunity in a market of 110 million people and which has previously relied exclusively on the State-owned Ethio Telecom.
Ethiopia recently announced that Safaricom would be allowed to offer mobile money services after Ethio Telecom, making the licence more valuable.
“The licence unlocks a unique opportunity for the Consortium to build out world-class services in Africa’s second-largest country by population, providing a compelling long-term growth vector for Vodacom and Safaricom,” Vodacom said.
“Furthermore, the investment in Ethiopia enhances Vodacom and Safaricom’s geographic diversification.”