Safaricom 2018: The Emerging-Markets Payments Battle

Abstract

The case discusses the decision of a hypothetical London-based hedge fund manager, Greg Rubin, who manages a fund primarily investing in emerging and frontier markets to decide whether to buy (or short) Safaricom, a Kenya-based telecom and financial services company that became globally known more than a decade ago (2007) for its use of technology to facilitate payments via mobile phones. There was a real need in Kenya for a different system of payments and money transfers, given the large underbanked population (almost 80% lacking a formal bank account) and the widespread use of cash. M-Pesa, the system introduced by Safaricom was an astounding success and quickly achieved a dominant position in the Kenyan marketplace. Kenyans embraced the use of mobile phones to transfer money and pay bills. More than 10 years later, at the time of the case (March 2018), Safaricom's dominance is challenged by a series of missteps expanding abroad (e.g., to South Africa), increased competition at home, as well as the introduction of 3G and advanced smartphone technology. The case allows for an examination of the investment thesis for Safaricom and its valuation. This requires the analysis of payment systems and their evolution in frontier markets as well as the analysis of country/political risk, among others. It is the combination of an innovative company from a frontier market and the introduction of new technologies that make this case interesting (and challenging) to analyze—by no means an obvious decision for Rubin. Excerpt UVA-F-1843 Rev. Aug. 22, 2018 Safaricom 2018: The Emerging-Markets Payments Battle SAFCOM is one of the best companies this author has ever covered over a fairly long career as a financial analyst, yet it is also one of the most challenging to value, owing to the dual nature of its business—on the one hand, an increasingly commoditized telecom business, where SAFCOM continues to deliver growth above the industry average; and, on the other, a fast-growing financial services business with a positive growth outlook. —Renaissance Capital, October 2017 In March 2018, Greg Rubin sat on his hedge fund's trading floor in Mayfair, London, working on an investment memo he planned to present to fellow members of his investment committee later that day. The investment option on the table for Rubin's absolute return emerging market fund was Safaricom, a telecommunications and financial services company based in Kenya. Ever since the company had achieved extraordinary success with the launch of its mobile payments solution, M-Pesa, a decade earlier, Rubin had considered the company a viable investment option. Even so, he still had more information to digest on the prospects for economic growth within this region of Africa and potential threats to the business before making a final recommendation to his colleagues. . . .