Is Crystal Telecom’s sale of shares a move to dilute political risk?

An MTN Rwanda centre in Kigali. Crystal Ventures plans to list its subsidiary Crystal Telecom, which has a 20 per cent stake in MTN Rwanda as its only investment, on the Rwandan bourse through an initial public offer. PHOTO | CYRIL NDEGEYA 

By SPECIAL CORRESPONDENT, The EastAfrican

In Summary

• Crystal Ventures owns 100 per cent of Crystal Telecom, and Crystal Telecom has a 20 per cent stake in MTN Rwanda, the country’s largest mobile phone services provider by market share.
• Crystal Ventures is the investment arm of the ruling Rwanda Patriotic Front. By selling shares in Crystal Telecom to the public through the IPO, the firm hopes to raise Rwf28 billion ($41 million).
• Crystal Ventures received Rwf5.2 billion ($7.5 million) from 2012 to 2014 in management fees, according to the information memorandum for the IPO; Crystal Telecom made Rwf4.1 billion ($6.1 million) in profit over the same period.
• The rationale of Crystal Ventures offloading its shares in its companies instead of its own shares at the Rwandan Stock Exchange has been questioned because of its cost effectiveness and denying investors a chance to spread their risks over the larger portfolio held by the holding company.

Crystal Ventures, Rwanda’s biggest investment company, has made more money over the past three years from its terminated management contract with MTN Rwanda than from dividends for its indirect 20 per cent stake in the mobile phone services provider.

The initial public offering of its subsidiary Crystal Telecom, which opened last week, is expected to allow investors to share in the fortunes of MTN Rwanda.

Crystal Ventures owns 100 per cent of Crystal Telecom, and Crystal Telecom has a 20 per cent stake in MTN Rwanda, the country’s largest mobile phone services provider by market share.

This is Crystal Telecom’s only investment so far.

Crystal Telecom earns dividends from MTN Rwanda. It also reports 20 per cent of what MTN Rwanda makes in profit as its share of income.

Crystal Ventures is the investment arm of the ruling Rwanda Patriotic Front. By selling shares in Crystal Telecom to the public through the IPO, the firm hopes to raise Rwf28 billion ($41 million).

Crystal Ventures received Rwf5.2 billion ($7.5 million) from 2012 to 2014 in management fees, according to the information memorandum for the IPO; Crystal Telecom made Rwf4.1 billion ($6.1 million) in profit over the same period.

However, it is not clear what the management fee charged by Crystal Ventures to MTN Rwanda over this period constituted. The fees were terminated in 2014.

On dividend payoff, Crystal Telecom earned Rwf2.1 billion ($3.1 million) in 2014, which was paid out on April 17, 2015, just before the IPO.

“Typical preferred projects are those that can deliver a minimum return on investment of between 15 and 20 per cent, with an investment horizon from 5 to 15 years, or until the sector matures with a clear and profitable exit option,” states a letter by Jack Kayonga, the chairman of Crystal Telecom, in the information memorandum for the IPO.

MTN Rwanda controls 49 per cent of the market, but its revenues have been declining as it faces stiff competition from new entrants such as Tigo Rwanda and Airtel Rwanda.

MTN Rwanda’s revenues declined from Rwf90 billion ($131 million) in 2012, to Rwf81.5 billion ($118 million) in 2014. Net profits fell to Rwf6.1 billion ($8.8 million) in 2014, from Rwf12.1 billion ($17 million).

The investment company also plans to offload shares in other companies such as Ruliba Clays, Rwanda’s sole brick and tile making company, and East African Granite Industries.

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The rationale of Crystal Ventures offloading its shares in these companies instead of its own shares at the Rwandan Stock Exchange has been questioned because of its cost effectiveness and denying investors a chance to spread their risks over the larger portfolio held by the holding company.

It will cost Rwf735 million ($1.1 million) for Crystal Telecom to list at the RSE.

Another perspective is that Crystal Ventures is raising money ahead of the Rwandan elections set for 2017.

Rwanda’s President Paul Kagame has hinted at running for a third term, which would require a change in the Constitution since the presidential term is for two limits.

For Crystal Ventures, an early IPO means it would be reducing its political risk by selling shares to the public.

A similar trend has been noted in Kenya, where politically connected companies sell their shares or raise capital a year or two before the general election. 
The initial public offering of Crystal Telecom is set to close on June 5.

The shares have been priced at $0.15, with at least two investment banks — Sterling Capital in Kenya and Uganda’s Crested Capital.

Crested Securities has advised its customers to buy the shares in the hope that they will appreciate to $0.17 over the next year.

The company said the introduction of mobile money in Rwanda and economies of scale enjoyed by MTN, the main shareholder, would contribute to the telco’s success.

Although the offer is open to investors from Burundi, Kenya, Tanzania and Uganda, they will have to contend with foreign exchange risks, starting with potential refunds at rates different from those at the time of application.