British multinational Vodafone said it recorded a loss of €37 million (Sh5.1 billion) from the sale of the company that holds M-Pesa funds to Safaricom for a symbolic price of $1 (Sh128).
The loss represents the transfer of a valuable subsidiary – M-Pesa Holding Company Limited – for almost nothing in a deal that is part of a years-long plan to put Safaricom in charge of critical aspects of the mobile money platform.
Vodafone disclosed the loss, which it described as a non-cash item, in its latest annual report for the year ending March 2024 in the disposals section of the review period. The deal was completed on 28 September 2023. “Under UK accounting rules, we recorded a significant non-cash accounting loss on this sale. This loss was non-tax deductible and, as such, resulted in a €37m item in our tax settlement. The €37m is purely an accounting disclosure, noting that we cannot use the recorded loss to reduce our tax burden,” Vodafone said in response to our inquiries.
The disclosure suggests M-Pesa Holding is worth more than Sh5 billion, but the multinational is giving away the business virtually for free after negotiations that began more than a year ago.
In the report, Vodafone defines a sale as the difference between the value of the net assets sold and the fair value of the consideration received. The amount is recorded as a gain or loss on sale. Vodafone’s disclosures show that M-PESA Holdings had significant cash and short-term investments funded by deposits from M-PESA customers at the time of the deal on 28 September 2023.
Vodafone said of M-PESA Holding’s financial position: “The balances included in the Group’s consolidated financial statement at the date of disposal include cash of €63 million, in addition to short-term investments of €1,195 million and €1,156 million due to M-PESA customers recorded under other investments and trade and other receivables, respectively (at the date of disposal).”
Despite the significant interest income generated by M-Pesa Holding, Safaricom has taken the decision not to consolidate the subsidiary’s financial statements into its group results.
“The results of M-PESA Holdings have not been consolidated into these financial statements,” Safaricom, which now owns 100% of M-PESA, says in its latest annual report.
In contrast, Vodafone included the performance of M-PESA Holdings in its financial statements prior to its disposal.
The multinational company said earlier: “The balances included in the consolidated financial statements of M-PESA Holdings as at 31 March 2023 include short-term investments of €1.247 billion and €1.226 billion due to M-PESA customers, recorded under other investments and other payables respectively.”
The deal was expected to boost Safaricom’s cash flows as well as generate interest income for the company by investing part of M-Pesa’s war chest in short-term securities such as treasury bills and bank deposits.
“In future, Safaricom will have full responsibility for the entire payment service system, including the operations of the fund. M-PESA Holdings will assume the functions and duties of the institutional custodian of the funds held in the fund for M-PESA account holders in Kenya,” the Kenyan telecom company says in the report.
“The funds held by M-PESA Holdings are due to clients and agents and relate to M-PESA units that have not yet been redeemed. M-PESA Holdings holds these amounts in cash, deposits and treasury bills in its bank accounts (trust accounts).”
Under Vodafone, interest earned on M-PESA deposits could have been used for charitable or institutional purposes at the discretion of the multinational company, according to a review of M-PESA Holdings’ trust document.
Vodafone now says it never benefited from controlling M-Pesa.
“For the avoidance of doubt, M-PESA Holdings has not generated any economic benefit to the Vodafone Group. No money, interest or investments relating to M-PESA Holdings have ever left Kenya,” Vodafone said in a statement.
M-Pesa Holdings holds client funds for M-Pesa clients in Kenya. It acts as an independent custodian for M-Pesa clients, managing the fund and holding all funds in the mobile money service. It is also a cash cow, holding and investing hundreds of billions of shillings in the short term amidst rapid growth in client deposits as well as transaction volumes and values.
The transfer of M-Pesa Holdings to Safaricom represents the telecoms company’s increased control over key aspects of the mobile money service, which was pioneered in Kenya but whose intellectual property was previously owned by Vodafone.
South Africa’s Safaricom and Vodacom Group Limited – in which Vodafone holds effective stakes of 27.7 percent and 65.1 percent respectively – teamed up in March 2020 to acquire the M-Pesa brand from the UK multinational for Sh2.1 billion.
The companies now retain the mobile money brand in their joint venture company M-Pesa Africa, which is registered in Kenya and which they own 50/50.
This move saved Safaricom a significant licensing fee that it was paying Vodafone to use the brand.