Safaricom IPO is a for test Uganda's Securities Exchange

Safaricom's decision to float its IPO on the Uganda Securities Exchange (USE) has sent ripples through the financial market in Kampala. Seen largely as a vote of confidence for the young exchange, the move may prove to be anything but.

The excitement is justifiable. Safaricom boasts a dominant market share in Kenya and has an innovative mobile-payment scheme known as M-PESA that is paving the way for mobile banking in East Africa. That innovation is paying off on the balance sheets. In March 2007, the mobile operator posted an impressive after-tax profit of $190 million, up 42.5 percent from the previous year.

But it is not all rosy for the company. Back in March questions arose concerning the ownership of Safaricom, specifically the involvement of a company called Mobitelea Ventures Limited. Although Safaricom is controlled by the Kenyan government through Telkom Kenya, Vodafone owns 35 percent and the remaining 5 percent belongs to Mobitelea. At issue here, is how Mobitelea acquired its stake in Safaricom. According to Vodafone, Mobitelea was an advisor on local business processes and protocol during Vodafone's negotiations with the Kenyan government. This though, is not a satisfactory explanation. Mobitelea is registered in Guernsey; any expertise the company may have on Kenyan protocols and businesses are highly suspect. What is more likely is that Mobitelea is a shell corporation whose true owners stand to benefit greatly from a Safaricom IPO. That IPO would have taken place in Nairobi but inquiries into Safaricom's ownership has slowed that process and forced the Kenyan government to look for alternatives to take the company public.

The sense of urgency is real. On November 16th France Telecom announced that it had won a bid to buy 51 percent of Telkom Kenya for $390 million. As part of that deal, the government of Kenya is required to sell 19 percent of its shares in Telekom Kenya within five years. The sell of shares in Safaricom will fulfill a part of that requirement, but not if a flotation is delayed by an investigation into Safaricom's ownership.

This is where Uganda's securities exchange comes in. By floating Safaricom on the USE, the Kenyan government would able to bypass the regulatory process in Kenya. It is a move that, if it happens, could taint the international reputation of the USE. But do not expect the young exchange to reject the offer. For all its success to date there are only nine companies listed on the exchange; it would benefit greatly by listing the East Africa's most successful company. Similarly, listed companies are not likely to complain. Stock prices rose with the news about Safaricom's IPO.

It is important to note the role that this announcement could play in the on-going efforts to integrate the East African states. There is already close cooperation between the exchanges in Dar-es-Salaam, Nairobi and Kampala, and there are plans to merge the three. If the Safaricom flotation goes down as a success, the USE will have a stronger case to be the center of a single East African bourse.