When EMEA Finance published its EMEA 300 list in September, African companies featured high on the list. The African telecoms sector is growing fast, while businesses in South Africa are investing elsewhere to reduce reliance on their domestic market. Abi Millar reports.
Kenyan company Safaricom is no ordinary mobile phone provider. Not only is the telecoms giant East Africa’s biggest corporate, but it also provides millions of Kenyans with access to formal financial services. Without use of its mobile money network, M-Pesa, these customers would lack banking facilities in what remains an overwhelmingly cash-based economy.
Introduced in 2007, M-Pesa enables Kenyans to send funds between accounts and undertake a wealth of other branchless banking services. More recently, the country has witnessed the rise of Lipa Na M-Pesa, which allows customers to use their phones at the point of sale.
Today, total transaction volumes over the network amount to some 40% of GDP, and Lipa Na M-Pesa has overtaken credit and debit cards as Kenyans’ preferred mode of cashless transaction. With its near monopoly on mobile banking, Safaricom has unsurprisingly become the operator of choice for calls and mobile messaging too.
“Safaricom has over the years been registering growth in its revenue streams and we attribute this to prudent management and the effective implementation of our customer-focused strategy,” CEO Bob Collymore tells EMEA Finance. “However, during the financial year we registered some strides that drove the growth that we reported. We launched the 4G network in Nairobi and Mombasa, we have expanded the M-PESA agent network, and we partnered with other corporates to widen the M-PESA ecosystem.”
Breaking the monopoly
Safaricom’s latest was certainly a strong year for business. Landing at number 94, Safaricom is one of just three Kenyan corporates (along with four Kenyan banks) to make the EMEA 300 list.
With a market capitalisation of US $6.85bn, the company saw its total revenue increase by 13% to 163.4bn Kenyan shillings. Mobile data revenue, which grew by 59%, has been billed as a key engine of future growth. And its 3G network, which now covers 69% of the population, is expected to rise to an astonishing 80% coverage by the end of the year.
Recently, however, the company has been forced to contend with a groundswell of emerging competition. One much-hyped rival is the Equitel mobile banking service, launched in July 2015. Developed by small mobile operator Airtel, in conjunction with Kenya’s Equity Bank (number 248 on our list), the service has been touted as a possible disruptor to Safaricom’s dominance.
As well as charging less for money transfers, Equitel promises not to penalise its users for switching between operators, and strives to foster better financial interoperability. While its market penetration is modest for the time being (450,000 users have signed up so far, compared to Safaricom’s 23.3m), it is aiming 5m users by the end of the year, and 100m across Africa within a decade.
Airtel has also been pushing for the government to enact legislation to increase competition. While Airtel holds about 23% of market share, Safaricom currently holds nearly 68%, and would likely be placed under threat by any regulation that sought to artificially level the playing field.
Collymore, who has described the proposed legislation as ‘distorting the free market and discounting the value of market competition’ is nonetheless confident that Safaricom can manage legislative changes.
“We cannot say that we have had any major setbacks this year,” he remarks. “However the regulatory and competitive environment remains dynamic and it has always been our policy to ensure that we always adjust in line with changes in the market, to suit our customer’s needs.”
Connecting the dots
Throughout Africa, telecommunications is going through a transitional period. Growing faster in sub-Saharan Africa than in any other region of the globe, the African telecoms market is proving to be one of the major success stories of the decade, with a huge amount of infrastructure investment underway to manage the rapid increase in data usage.
Currently, mobile penetration of the continent stands at around 72%, but connectivity is improving rapidly, and the proportion of the population with a smartphone is growing at around 25% a year. As a result, Africa represents a key growth opportunity for service providers looking to invest in this space.
Aside from Safaricom, nine other African telecoms providers make our EMEA 300 list. Five of these are Egyptian (Orascom at 299, Mobinil at 254, Global Telecom at 232, Telecom Egypt at 226 and Vodafone Egypt at 225), whereas Morocco’s biggest operator, Maroc Telecom, comes in at number 53. Maroc Telecom completed a major M&A deal with UAE-based operator Etisalat in January 2015, bringing its market cap to US$11.38bn.
South African-listed Vodacom, which has operations in over 40 African countries, is at 28 with a market cap of US$17.27bn. And MTN Group, also in South Africa, reaches number 7 with a market cap of US$34.07bn.
Right at the top of the rankings is the biggest publicly traded company in Africa, Naspers, which lands at number 3. Dwarfing its rivals with a market capitalisation of US$68.12bn, this South African giant has attained its status partly through the sale of bonds to fund emerging market internet acquisitions.
Following the appointment of Bob van Dijk as CEO in April 2014, the firm announced it would transform itself into a ‘predominantly mobile’ company, and would be looking to acquire more stakes in e-commerce companies.
“Our mobile-first focus has been an advantage in developing consumer products and services in our e-commerce markets,” says the company’s head of investor relations, Meloy Horn. “In general we have a good track record of identifying trends early – as a group we’re quite nimble and able to adapt and move fast.”
A look at Naspers’ history bears testament to this adaptability. Originally a publisher of newspapers, books and magazines, the company overhauled its image around the turn of the century. Since then, Naspers has branched into many forms of media, with private-equity style investments across the world in internet, TV and print.
In 2001, then-CEO Koos Bekker bought an interest in what would become its main source of value – a $32m stake in Chinese start-up Tencent. As Tencent blossomed into one of the world’s largest internet companies, Naspers’ fortunes grew in tandem, with its shares quintupling since 2010. Today its 34% stake is worth around US$66bn, accounting for the majority of its own market capitalisation, and the two companies have seen a 98.5% correlation in their share prices over the last five years.
Since Naspers’ other investments are notably not on this level (they include Africa’s largest pay-TV network MultiChoice and a $1.6bn holding in the Russian portal mail.ru) it would be easy to characterise the company as a venture capital fund riding on a single major deal.
That said, the bullish approach to risk-taking that led to Tencent is still firmly in place, and the company is searching hard for new emerging market tech deals. Over the past year, it has spent US$347m on e-commerce acquisitions. It is seeing particularly strong revenue growth in India, where it has bought the ticketing platform redBus and increased its stake in the ecommerce portal Flipkart.
Closer to home, the past year saw Naspers grow its video-entertainment base by 27% to reach 10.2 households on the African continent. This has led to modest revenue increases across the sector, despite the depreciation of the rand against the US dollar.
“Our diversified footprint reduces the exposure to any one country or currency,” says Horn. “That said, a weaker South African rand and other African currencies relative to the US dollar impacts negatively on the input costs of our video-entertainment business, particularly programming costs. We hedge our net exposure up to two years our, but at higher rates, which then translates into a higher cost base over time.”
Staying afloat in SA
Economically speaking, the picture for South Africa as a whole has been relatively bleak. Unemployment levels have increased and factory production declined, and the state-owned utility Eskom has continued to struggle to meet electricity demand. Against a backdrop of declining commodities, this commodities-level economy has taken a beating: in June 2015, the rand slumped to its lowest level (ZAR12.71 per dollar) in over 13 years.
All the same, it has been business as usual for the high-flying South African companies on our list, with seven corporates and three banks appearing in the top 50.
One particularly strong performer was Woolworths Holdings Ltd, which sits at number 86 on our list with a market cap of US$7.72bn. This reflects significant growth since 2014, when the company was at number 132.
Overall, the company has seen sales surge by 55% over the past year, boosted by the A$2.1bn purchase of Australian department store David Jones last August. The financing was repaid in part by a rights offer, finalised in September 2014, which raised nearly ZAR10bn through 167.8 million new ordinary shares. (We acknowledged the move in March, by awarding Woolworths ‘best follow-on funding in EMEA’ in our Achievement Awards 2014.)
So far, the strategy looks to be paying off, with the acquisition helping to reduce reliance on what has long been a volatile market.
“It has made us a very significant southern hemisphere retailer provides us with the scale and opportunity to deliver significant benefits to our shareholders, and our customers in South Africa and Australia,” says Ralph Buddle of Woolworths Corporate Finance. “In David Jones, we have a natural hedge against the rand through earnings in Australian Dollars. Our expansion in the Southern Hemisphere allows us to compete much more effectively against international brands in the South African market.”
Woolworths also has stores in a number of African countries outside of South Africa. While forced to withdraw from Nigeria in November 2013, it recently bought back its franchise businesses in Botswana, Namibia, Ghana and Swaziland, meaning all its African operations are corporate or joint ventures. For now, with plans to expand its footprint further across the continent, the retail firm is flying high.
Another high performing corporate is Steinhoff International Holdings Ltd, South Africa’s biggest furniture retailer, which has been nicknamed ‘Africa’s IKEA’. Last year, the company sat at number 71 on our rankings; this year, with a market cap of US$22.08bn, it leaps to number 20.
“The year has been an exciting one for the group, with our existing retail businesses gaining momentum,” says Mariza Nel, director of corporate services. “We are particularly pleased with market share gains in most of the territories where we trade, as these were achieved against a backdrop of volatile market conditions and prevailing consumer uncertainty.”
With operations across Europe, Africa and Australasia, Steinhoff has focused on tactical consolidation opportunities across all its markets. By the end of this year, it has said it will increase its exposure to European investors by selling shares on the Frankfurt stock exchange (retaining its listing in Johannesburg).
The clear highlight of the past 12 months, however, was the purchase of a 92% stake in the SA-based Pepkor Group last November. At around US$5.7bn, this was the third largest acquisition of a South African company in history. It has allowed Steinhoff to diversify into apparel, opening the door to a fast-growing market in Africa and Eastern Europe.
“Steinhoff’s immediate operational focus will be to focus on implementing the Pepkor acquisition and focus on the benefits that the combined entity will provide to the group in terms of efficiencies,” says Nel. “In addition, we have had good momentum and growth in terms of our e-commerce platforms and omni-channel retail approach, particularly in our French business. This concept will now be tested and rolled out in other relevant geographies.”
For a company to post such strong results would be encouraging enough at any time; still more so during a period of notable economic turbulence.
But for the 100 African companies on this year’s EMEA 300, this kind of dynamism is the rule rather than the exception. While these businesses represent a wide range of sectors, and an even wider range of corporate strategies, they are united by one key driver: the hunger to delve deeper into some of the world’s fastest growing emerging markets.
This article appears in the August / September edition of EMEA Finance