Equity Analysis /
Kenya

Safaricom: Airtel to acquire Telkom: Net positive for Safaricom, but downgrade to Hold on price appreciation

    Tracy Kivunyu
    Tracy Kivunyu

    Equity Research Analyst, Telecoms

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    Tellimer Research
    12 February 2019
    Published byTellimer Research

    Airtel and Telkom announced a merger on Friday that will not significantly affect Safaricom, in our view. The combined entity is unlikely to negatively impact Safaricom due to lower investment in network quality as well as low distribution of mobile money agents and merchant partnerships. If anything, the merger may be a net positive, as Safaricom could subsequently push for a revision of proposed dominance regulations due to market consolidation. We maintain our target price of KES27.42 but downgrade our recommendation to Hold (from Buy) due to the strong share price performance in recent sessions. Our TP now suggests an ETR of only 6.5%.

    Airtel and Telkom to merge their mobile businesses. The two telcos will merge their respective mobile businesses in Kenya, to operate under a joint venture company to be named Airtel-Telkom. Telkom Kenya Limited’s real estate portfolio and fibre optic infrastructure will not form part of the combined entity. The final shareholding will be determined at the closing of the transaction. Telkom Kenya has the option of holding up to 49% of that shareholding. The merged company will be chaired by Telkom Kenya Limited CEO, Mr Mugo Kibati, while Airtel Networks Kenya Chief Executive, Mr Prasanta Sarma, will be appointed CEO. The finalisation and closure of the transaction is subject to approval by the relevant authorities.

    Merger unlikely to hurt Safaricom’s competitiveness… The merger will see the combined entity hold 31% subscriber market share (with Telkom contributing 9%) compared to Safaricom’s 64%. Airtel also stands to benefit from Telkom’s network of mobile money agents, but their combined network will only equate to 30% of Safaricom M-Pesa agents. The combined spectrum allocation will be the same as Safaricom’s, but we believe that investment in network quality will be the main differentiator, and this is where Safaricom has the edge. Consequently, we expect Safaricom to remain the market leader.

    …but could lead to a re-evaluation of dominance regulations. The merger will result in a two-player market. This may create an opportunity for Safaricom to lobby further against the dominance regulations, especially the proposal to limit any offers or promotions that Safaricom launches which could not be reasonably replicated by another operator. This proposal, if implemented in its current form, would lead to an increase in data prices which may impact affordability and consequently, usage. 

    Upside risks to our forecasts and Hold recommendation include a slowdown in price competition in the mobile data segment, revision of dominance regulations and strong uptake in M-Pesa usage from Fuliza and merchant partnerships. 

    Downside risks include implementation of dominance regulations in their current form and adverse price competition on mobile data.