Scangroup & Ogilvy Africa

At the end of April Scangroup announced a deal to buy into the Ogilvy Africa group and has now invited its shareholders to approve the transactions.


1. The acquisition of 51% in O&M Africa and 50% in Ogilvy East Africa will be structured as
- O&M Africa: 51% is to be acquired by payment of $238,360 (Kshs 19 million) cash and transfer of 6.2 million shares of Scangroup worth Kshs 166 million.
- Ogilvy East Africa: 50% will be acquired by payment of Kshs 13 million to Ogilvy south Africa (paid in US$) and transfer 4.4 million shares worth Kshs 118 million, and a payment to fellow shareholder Russell Holding of one euro and payments to Koome Mwambia comprising cash of Kshs 20.6 million and transfer of 3.12 million Scangroup shares worth Kshs 82.4 million
2. Shareholders will have to approve creation of 14 million new shares and waive their pre pre-emptive rights to allow the new shares to be allotted to Ogilvy South Africa and Koome Mwambia.

Winners
- Scangroup gain entry via minority shareholding in Ogilvy into Namibia, Cote d'Ivoire, Senegal, Burkina Faso, Cameroon, Gabon, Zimbabwe, Nigeria and non-equity affiliates in 11 other African countries to create a Pan-African agency
- Koome Mwambia sells out his shareholding gets cash and becomes a top 10 shareholder in Scangroup and he is to enter into a management agreement to remain MD Ogilvy East Africa
- MD Bharat Thakar gains a pan African footprint and loses just 5%

Losers
- Local investment bankers: No transaction advisers were appointed and the IM only has an opinion from BDO East Africa that issue price of Kshs 26.4 is fair and reasonable and Deloitte's calculation of these price (now trades at Kshs 36)- Kenyan corporates whose choice of partners in media, PR, advertising got smaller – as Scangroup, Ogilvy, Hill & knowlton, Blueprint, Mindshare , Millard brown, Squad digital, Smollan are all under one roof.
- Scangroup if the share swaps are denied by the South African authorities, will have to pay Kshs 427 million ($5.2 million) to proceed

From Huawei to Makmende

Last Tuesday was a roundabout day that began with the Equity Bank half year results announcement at and ended with Safaricom launch of a U8220 Android phone made by Huawei.

In between I shook hands with James Mwangi, Churchill dodged my paparazzi snap attempt, a friend of mine missed out on a free giveaway of the Huawei phone, and I missed out on buying some shares in Equity Bank as my stockbroker (temporarily) misplaced my funds.

At the Huawei launch, I had interesting chats with one pal on Kenol and another who found out an interesting tale about mobile spectrums – basically Kenyans should ignore mobile phone company promises and forget about 4G as its’ reserved for the Kenya military until further notice.

Huawei and Safaricom were jointly launching an android phone to the Kenyan market and since the Safaricom COO was late in traffic as per his boss, Michael Joseph the CEO stepped up and launched the phone on his behalf. The CEO seemed underwhelmed by the occasion, maybe because his retirement was about to be officially announced or maybe because it was because the Smartphone being unveiled would cost about Kshs 30,000 and was nowhere near the $100 (~Kshs 8,000) price for a smart phone which he has commented as being a key target for future data growth.

This ambivalence perhaps cascaded down because when Safaricom ran adverts for the new phone in the next day's paper , they were advertising a VF845 costing Kshs 16,500 ($206) and not the U8220, which had just been launched. The 'correct' ad for the U8220 then ran the following day pricing the phone at 27,200 (~$340)

Two days later, Bank of Africa formally opened their Ngong Road branch at Bishop Magua Center. This is their second branch opening this month after Nakuru and they have set out to go after the not for profit customers. They have launched a Goodwill Current Account with goodies for NGO's including waiver of monthly ledger fees, cheque book costs, (Kshs) withdrawal/deposits, internal transfers, incoming wires, banker’s cheques, interim statements and a minimum operating balance.

And finally on Friday, in the same building, the iHUb hosted a launch by Kuweni Serious (Get Serious) of a of a series of clips aimed at getting young Kenyans to participate in the constitutional referendum and in public life and starred Makmende.
Here’s one clip

Farewell Michael Joseph

Safaricom announced in a statement that their long-serving CEO Michael Joseph will step down in November from the helm of the company. He has been CEO as long as this blog has been around and a search through archives finds these posts

image from the business daily
- Long before, the IPO there was a shareholder tug of war evict him in favour of a Kenyan CEO

- In 2006 he gave a talk at the British Council on how the company which started with 5 employees and 17,000 customers, overhauled celtel and came to be one of the largest revenue earners and tax payers in Kenya. The talk was given before the IPO and before they launch M-Pesa and had numerous insightful tales, as he was the only spokesperson for the company and he also touched on low education standards, wrong government statistics, the problems at kencell/celtel/zain/ and political battles to succeed his seat.

- The first post IPO report shows that he has 2.35 million shares in the company, same as the CFO so probably a contractual bonus

- He has said post retirement that he will contemplate becoming a Kenyan citizen. He (and the company) have received manyaccolades both local and international. Form government, the private sector and he is noted for his CSR efforts especially in conservation of wildlife and forest

- For many years, he has been Kenya’s Steve Jobs, a man so closely inter-wined with their brand and with a medical history, but whose company had not defined a succession plan until this week. New reports indicate the new CEO will work with MJ for two months from September, and that he will continue on in advisory role even after he leaves the CEO office.

Other Blogs
- Kainvestor asks if he was corporate legend?
- Ratio Magazine on how the retirement may shake up the local mobile & telecom sector
- Interviews with the CEO

Karibu Member

On July 20 Equity released their half year results at Equity Centre headquarters in Nairobi CEO James Mwangi mentioned that they are usually the first with results (this time pipped by KCB who are in the middle of a rights issue)

Positive economic outlook: He noted that the picture is much improved from last year; with good agricultural harvests and prices, high exchange rate, government social programs rolled out (Vision 2030 social equity programs for the youth & marginalized), positive progress in the political arena in terms of new constitution, formation of the East African community with 126 million people, remittances are above 2006 figures, tourist arrival are ahead of the 2007 figures, and overall the economy of Kenya is expected to grow by 4.5 – 5% this year.

Bank focus: How does bank focus strategically?
- They have introduce new concept to influence direction of the bank, which for many years operated at micro finance until five years ago went into commercial banking. They have now created structure and are building capacity to move into investment banking (highest IRR per unit of capital), and merchant banking (private equity, venture capital) around east Africa.
- About 400,000 customers graduated to upper and middle SME’s class. They have invested in a level 4 data centre, with a 65 million-card switch and banking platform that can handle 35 million. also boldly claimed that they have overtaken Safaricom to be Kenya’s premier brand
- Innovation will continue through more collaboration with Telco (e.g they have opened 400,000 m-kesho accounts) without agents (yet) and are doing about 20,000 ones per day. Their their dream of opening 10 million accounts is still alive. They are acquiring merchants for visa and MasterCard (3,000 merchants in Kenya) and CBK has approved 4,000 retail outlets to become agents; they want agents to do transaction processing (withdrawals/deposits) at a commission, and equity do loan processing - so when you go buy milk and bread from kiosks, you may be able to withdraw cash

Bank performance: compared to last June
- Added 20 branches (now 165) but none in 2010, and 550 ATM’s (up from 494) and say they have achieved staff stability (5,169 from ,5,056) - no more huge growth in numbers
- Have 4.96 million deposit accounts (up from 3,.9m) and loans 833,819 loan accounts (up from 710k)
- Loans of 68.3 billion (up 27%) deposits 87.8 (up 53%) and assets 122.5 billion (up 40%) – CEO noted that with the economic recover they ate going back to the days when deposits used to grow at 70 % p.a.
- Interest income was 7.3billion (up 45%), commission income 3.8 billion, total income was 10 .1 billion and with expenses at 6.27 billion, (up 36%), profit before tax for teh half year was 3.88 billion [~$48 million] (up 46% from last June)

Summary: He’s optimistic because unlike last year, income is now growing faster than expenses, staff costs grew at 16% compared to previous 40% and asset quality back to 2007 (before Kenya election chaos and drought). The CEO was keen to emphasized that capital base of bank good, and shareholders will not be diluted this year or next year and that their investment in human resource, capital and systems are large enough and stable enough for the next three years, meaning that they can at least double in size without making new investments or seeking new capital.

Q&A

Regional diversification How have Sudan and Uganda performed?
Sudan: Contributed to profit in first year of investment almost ~$2m– not bad for Greenfield. So far only operated in equatorial Sudan, which they can run from Uganda. They have also got lots of corporates to sign with them as their bankings, which used to take 4 days, now takes seconds with equity. The CEO expect S. Sudan to have a peaceful referendum vote next year, which will yield Africa’s 54th state

Uganda: Here, they have been bleeding - in Q1 lost 12b shillings (Kshs 600m), Q2 made los of 3b shillings (Kshs 120m) – but expect to break even this month, and be out of loss in September. In Uganda they made a made mistake, as they did not freeze lending when they bought the other bank - left in the old managers who lent $16 million in 3 months. He believes its much improved; even though they bought a non deposit taking organization, they now have more deposits than loans, (have mobilized Kshs 4b deposits, compared to loans at Kshs 3b) and have 440,000 savers in Ug.

Their increase in provisions in H1 of 2010 (up 211%) is as a result of making a one off hit to clean up Uganda books and the investment was a learning process for them. In hindsight they should have frozen lending and it’s a good lesson they will apply in more countries – the cost would have been much higher if they had made their first outside investment in south Africa or Nigeria and they still have their plan to be in 10 African countries in the next 5 years and now have a 50 member expansion team.

The next foray in East Africa is likely to be Tanzania, earlier they had wanted Rwanda, but there was no easy entry point. But with the new east African community protocol, staff will be able to work without work permits, and it will be much easier to travel across borders

Cyber crime: While he said there have been no hacking attempts on their secure systems, his managers mentioned that there have been attempts to phish or skim originating from eastern Europeans who see Africa as a soft target - however the attacks are not specific to Equity Bank (who are a leading issuer of visa cards) who are on their guard and have not lost through this fraud.

Agency banking opportunities: - From September this year, customers whose salaries pass through Equity will be able to apply for loans from mobile phones or ATM's, not fill out any forms, and automatically get approved a loan (without human interaction)
- They do about 2,500 M-Pesa transactions each day through their ATM’s from which they earn more than normal ATM charges, gettingabout Kshs 50 – 60 per m-pesa transaction as customers come and withdraw amounts that other agents can’t facilitate owing to float

Barclays no longer flat

A few years ago Kenyan banks rolled out a variety of flat fee accounts; this was at a time that there was an outrage in the country over bank charges pumping up bank super-profits.

The flat accounts offered a range of services at one flat fee. NIC was the first with MOVE, then Diamond Trust, Standard Chartered with Diva (for Women) and later X Account (for Yuppies), while Barclays had Bouquet accounts that cost Kshs 490 ($6.5), 590 and 690 ($9.2) per month.

They are few now left. Diamond Trust took their fee lower, and NIC went higher to ease out the flat tariff. Now Barclays have joined suit; for a while, they may have felt they were being taken for a ride by their customers (perhaps business owners who funneled large volumes of transactions through the flat fee account, and a few months ago) they tried to disguise an increase in the minimum fee flat fee from 490 to 590, by claiming that they had added ‘free’ mobile banking.

One problem with flat fee accounts for some sustomer who underutilized the accounts (like myself) was that they were limiting in that you paid much more than you used and you could not get additional services without paying extra; flat fee accounts could not be altered, e.g. to get a cheque book or set up a standing order you had to move to a higher priced account

Last weekend Barclays did a system upgrade and one end product seems to be a removal of the flat fee monthly accounts in exchange for a more conventional transactional charge for each over the counter or ATM transaction. The new accounts are called bank account (reduced ATM fees), bank account plus (free banking if over 50,000 [$625] in account), business flexi (cheque book) and business bouquet (first 20 transactions free). They also have tie-in discounts with Tamasha/buffet Park. Nike shop, Nairobi sports house and Sherlock’s den