Deal making to finance the future at the African Investment Forum 2021

Next week at Abidjan, Cote d’Ivoire sees the return of the African Investment Forum (AIF) that is supported by the African Development Bank Group (AfDB).

This years’ summit, from December 1 to 3, will be a hybrid mix of physical and virtual sessions and is expected to feature the Presidents of Rwanda, Benin, Mozambique and Togo alongside other continental and international business leaders.

The 2020 annual meetings of the AfDB set out a focus for mobilizing financing towards infrastructure, regional trade and health care and those have carried on into the 2021 AIF whose theme is “Accelerating Transformative Investments in Africa.” It targets five priority investment sectors of agriculture & agro-processing, energy & climate change, health, ICT & Telecoms and industrialization & trade.

At the inaugural AIF in 2018 in South Africa, deals in demand were energy investments for Southern Africa, while East, Central, North and West Africa all had infrastructure top their deal discussions. Eventually, the forum secured $38 billion of investments for 49 projects across the continent.

At the next AIF in 2019, 2,200 participants from 101 countries discussed 57 deals worth $67 billion and eventually, investments were secured for 52 deals worth $40 billion. The 2019 forum also saw 16 SME’s and startups get to pitch in different boardrooms, now a staple of the AIF, alongside industry giants raising millions of dollars for larger projects.

There was no AIF last year, because of Covid-19, and the spotlight that should have been on deals to accelerate African Continental Free Trade Agreement (AfCFTA), has now taken on an added element of helping country economies rebound from Covid-19. The African Development Bank has provided support to different countries through a COVID-19 Rapid Response Facility. Also at the 2021 bank annual meetings, AfDB President Akinwumi Adesina announced that the G7 heads of state had heeded a call that $100 billion of the special drawing rights (SDRs) being issued by the IMF, be provided to support African countries as they tackle debt challenges while responding to Covid-19.

This year priority deals are being discussed that revolve around recovering from Covid-19 and include hospital projects in Angola, Cameroon and Nigeria. Another is to secure $45 million for a vaccine production facility in Eastern Africa that will manufacture three vaccines for the WHO, including one for Covid-19. There are also cotton industry projects for Burkina Faso and Mozambique as Covid-19 showed the need for self-sufficiency and a need to promote local manufacturing capabilities.

Highlights of the 2018 AIF: Afreximbank bank launched a project preparation facility, Mara launched an Android phone, there was an African creative industry showcase and social boardroom sessions for deals in Ghana and Zambia.

Highlights of the 2019 AIF: There were 6 concurrent boardroom sessions, a $600 million investment for the Ghana Cocoa Board, a financing deal for a road-rail bridge over the Congo River to link Kinshasa and Brazzaville, a forum on unclogging digital investments, and the launch of the (4th) Visa Openness Index report. It also featured sessions on opening the bank vault for women entrepreneurs, agro-processing industrial zones, climate change, an infrastructure financing trends report was launched, and a Lusophone compact for Portuguese-speaking African countries that reviewed six investment deals worth $702 million.

2021 AIF Format: Because of Covid-19 restrictions, the AIF will have 250 physical participants in Abidjan while over 2,000 others will connect virtually to participate in the boardrooms, virtual marketplaces, and virtual B2B meetings with investors and sponsors. In addition to the plenary sessions, there will be other parallel invite-only sessions that will feature heads of state, policymakers and industry leaders, some of which will be aligned for American and Asian timezones.

Anyone interested can register here for this year’s event, while companies and individuals are encouraged to join the AIF platform. There they will access financial and investment opportunities as they network with communities of other professionals.  

MTN Uganda IPO 

MTN Uganda has an ongoing IPO in which they plan to raise UGX 895 billion (US$252 million) from selling 20% of the company to local investors and floating the shares. Like in Ghana and Nigeria before, the listing of shares on the local stock exchange by the leading telecommunications firms in the countries, has become a licensing requirement, and MTN, which signed a new 12-year license in 2019, is doing this ahead of a June 2022 deadline.

Looking at the IPO prospectus, and extracts from an MTN executive briefing in Nairobi this week, some of the highlights of the offer are: 

  • About MTN Uganda: Founded in 1998, it is the largest of two telcos in the country with a 55% market share compared with 45%  for Airtel. It is the most admired brand in the country and part of the MTN Group that is in 27 African countries and one of the largest brands on the continent. MTN Uganda had 2020 revenue of  UGX 1.88 trillion (about $531 million) and a pre-tax profit of 460 billion ($130 million). It has 15.7 million phone subscribers, with 5.3 million active data users and 9.4 million mobile money users.
  • Uganda Market: In the densely-populated country of 44 million people, MTN sees much more growth from the young population, as the current mobile penetration of 67% is considered low for Africa. Also, wIth Africell having exited in October 2021 and  Smart Telecom about to follow suit, MTN’s market share could reach 60%.  
  • Offer: 4.47 billion ordinary shares, accounting for 20% of the company are on sale at UGX 200.00 ($0.057) per share. The minimum lot is 500 shares, so the investment required is UGX 100,000  ($28) per shareholder. 
  • Allocation: All East African community shareholders are being offered 5 incentive shares for every 100 they buy, but MTN customers who apply on the IPO platform and pay with MTN mobile money get another 5, for a total of 10 incentive shares. Ten (10) incentive shares for every 100 bought are also being offered to Uganda professional and East Africa professional investors who purchase shares worth over UGX 177 billion ($50 million). If oversubscribed, Uganda retail investors and MTN employees will be given priority and allocated up to UGX 5 million ($1,414), with others on a pro-rata basis, in the order of Uganda professional investors, then East African investors, and finally international other investors. MTN has received approval to market the shares to investors in Tanzania and Kenya, and they await clearance from other EAC countries. The offer may be suspended if it does not reach 25% uptake (about 1.12 billion shares)
  • USE: The MTN shares will be listed on the Uganda Securities Exchange. Currently, its largest counter is Stanbic Bank Uganda, that had its IPO in 2006, and accounts for about half the market activity, but MTN are expected to overtake them after listing their 22.39 billion shares in December.
  • IPO Applications: The process is fully electronic and starts by applying online to open a securities central depository (SCD) account. This can also be via USSD on an MTN line, or via the MTN app or at an authorized selling agent. In  Kenya,  investors can apply through a stockbroker like Dyer & Blair who will verify their ID and PIN details. The minimum to buy is Kshs 3,250 at Dyer & Blair, which is for 500 shares at Kshs 6.50 per share.
  • Shareholding changes: Ahead of the IPO, currently MTN Group owns 21.5 billion shares (96%) and the MTN Chairman, Charles Mbire, a Ugandan businessman who also chairs the USE, owns the other 4%. After the IPO, MTN will have 76% and new investors will have 20%, and MTN, Chairman Mbire, and the directors have committed not to sell any more shares for the next year. MTN Group will still exercise controller the composition of the board, and acquisition, financing, and branding decisions.
  • Taxes: MTN Uganda is the largest taxpayer in the country and they paid a disputed amount of transitional license fee totaliing UGX 50 billion ($14.1 million) ahead of the IPO.
  • Use of Funds and Debts The funds raised will go to reimburse MTN who have grown the business since inception by investing over one trillion shillings and who have also committed to investing another trillion over the next three years expanding the network, mainly in rural Uganda for other growth activities. MTN Uganda’s debt is UGX 194 billion (equivalent to about $55 million) and $45 million at June 2021. MTN Group has arranged a syndicated loan, through Stanbic South Africa, with local banks in Uganda – Stanbic, Absa Citi and Standard Chartered.
  • Fintech opportunities: The country was reported to have 31.3 mobile money accounts but after a cleanup exercise, the number of active subscribers was determined to be 20.3 million. MTN’s mobile money has 45,000 merchants customers signed on, it sees a great opportunity to grow that market that it predicts can be ten times larger. They will also roll out bank tech products – savings, loans and insurance – and compete with banks at the bottom of the pyramid.
  • Dividend: Payout was 57% of profits in 2018 and 2019.  
  • Threats: Price competition may affect average revenue per user and profit margins, and a weakness identified is the low income of consumers.
  • Timelines: The IPO runs for just over one month. It opened on October 11 and closes on November 22, with an announcement of the results on December 3 and listing on December 6. Refunds, if any, will be paid from December 3. 
  • Transaction advisors: SBG Securities Uganda is the transaction advisor and lead sponsoring broker. Receiving banks are Stanbic, Standard Chartered and Absa in Uganda. Selling agents are SBG Uganda, Dyer & Blair Uganda, Crested Capital and UAP Old Mutual. In Kenya, these are SBG Securities and Dyer and Blair.
  • Offer Costs: Budget is UGX 32.6 billion with MTN International expected to foot 22.3 billion and MTN Uganda the other 10.3 billion. The bulk of the payments are the placement fees (UGX 9.9 billion) and the transaction advisor (7.5 billion). Others are VAT on professional fees (3.6 billion), while the tax advisors in SA and Uganda will earn a total of 4.2 billion. There is also the reimbursement of selling agents of retail shares (4.2 billion) and the public relations bill to MTN Uganda is UGX 356 million.
  • Valuation:  With the shares offered at UGX 200, Dyer & Blair advise a “buy” with a target market price of UGX 218, a 9% upside from the current offer. And when incentive shares are factored in, this makes the value of the shares almost 15% higher than the IPO offer.
  • Verdict: The euphoria could be similar to the Safaricom IPO in Kenya, whose investors are also yearning for another large IPO.

Read more at the MTN Uganda IPO official website.

AA of Kenya restructures for the future

The Automobile Association of Kenya (AAK) is over a century old and a member of the  International Automobile Federation (FIA). It is known for roadside assistance, its driving schools, setting mileage rates, Autonews magazine, car valuations for banks and vehicle inspections. It is also the go-to place for the issuance of international driving licenses, and carnets which are passports for cars to travel across borders e.g to Tanzania, Uganda or for other trips like this bike ride to South Africa.

Before you go on one of these trips, make it easy for yourself and get the following:
Carnet de Passage for each vehicle (get this via AA)
COMESA insurance (get via your insurance company, or buy at the border)
International driver’s license (get via AA)

The AAK had 2019 revenue of Kshs 722 million, expenses of Kshs 643 million and profit of Kshs 79 million. In Covid-affected 2020, revenue dipped to Kshs 472 million, and its net profit was 11 million. It had 100,000 members and net assets of Kshs 252 million.

While other automobile associations around the world do things like operate hotels & petrol stations and do helicopter rescues, the AAK plans its future revenue diversification ventures to include:

  • Establishing service centres in Nairobi, Mombasa, Kisumu, Eldoret and Nakuru.
  • Establish a learning centre called the Africa School of Mobility.
  • Be a leader in innovating mobility products and lead in green technology research.
  • Expand to all 47 counties and later to Rwanda and Ethiopia.

The envisioned projects all take capital so, at a special meeting in October 2021, AAK members voted to demutualise from being an association under the Societies Act and convert to a public limited company (PLC). They overwhelmingly passed proposals, with support ranging from 88% to 99%, including 93% for the AAK to do the demutualization and capital raising project.

The process will see the transfer of assets and investments to Automobile Association PLC, a holding company which will raise capital through a restricted public offer that is open to a new class of “full members.” The company will have an insurance brokerage as a subsidiary and an AA institute as an affiliate.

Currently, AAK members enjoy discounts on petrol (at Total stations), batteries, tyres, shock absorbers, and other services from partner organizations. But in future, “full members” will get shares, voting rights, more discounts on products and services that the AAK will continue to offer, in addition to dividends in future as shareholders. The AAK has also joined the Nairobi Securities Exchange (NSE) Ibuka accelerator program.

One can now enroll for full membership by paying a one-off fee of Kshs. 50,000 through card, M-pesa or deposit at the Cooperative Bank before December 31, 2021. This has been discounted to Kshs 40,000 for anyone who was an ordinary member of the AAK before the meeting date of 19 October. AAK transaction advisors are Standard Investment Bank, MMC Asafo and Tim Sky Media.

Nairobi Real Estate Moment: 2021

  • The Nairobi Expressway construction that will span from the Jomo Kenyatta International Airport to Westlands, has reached downtown Nairobi and is causing disruptions to real estate and traffic .. some changes to retail include..

  • Changes to Malls – many of which are largely idle above the first floor. Quite a bit of foot traffic there is from bank customers visiting their branches which have now been relocated to the third and fourth floors of Nairobi malls.

Other real estate stories.

  • An EFG Hermes report on Nairobi real estate found the demand for affordable houses has a disconnect that has seen prices are softening in Nairobi – at high-end residential (-27% below 2017 peak), and commercial properties (-13% off-peak). Also, the tough Nairobi office market is very visible (vacancy rates of 22% compared to 9% in 2011) with exposure to some financing banks including KCB and Housing Finance.
  • Orbit Group and Grit Group have partnered on a 25-year $53.6 million sale & leaseback transaction for a light industrial (warehouse and manufacturing) property on Mombasa Road, supported with a $25 million loan from the IFC. Orbit Products Africa, controlled by the Sachen Chandaria family, is a leading contract manufacturer for brands in personal care and home care products and its clients include Reckitt Benckiser, Unilever, Colgate and Henkel. They will expand the plant by an additional 14,741 m2 warehouse space and improve it to modern FMCG industry standards to achieve an IFC EDGE green building certification on completion. As part of the deal, $31.5 million will be a “perpetual note”, raised from Ethos Mezzanine Partners GP and BluePeak Private Capital and additional proceeds from this will be invested in the St Helene Private Hospital in Mauritius, an idea that was conceived by Catalyst Principal Partners. Grit Real Estate Income Group is listed in London and Mauritius 
  • A Knight Frank report, the “Africa Logistics Review” finds that Nairobi had the best real estate market between 2018 and 2021 for prime warehousing and logistics.  “Nairobi recorded the highest increase in average prime rents across Africa, from USD 4.70 psm in 2018 to USD 6 psm ” – and developers have grown over 170,000 square meters in the last five years. Kenya has the highest concentration of special economic zones (SEZ) in Africa (61 of the 180 SEZ’s). The country is also making good progress to grade A warehousing and in growing a real estate investment trust (REIT) ecosystem.  Also because of high land values in Nairobi, developers have sought towns/areas beyond traditional industrial hotspots Read more.
  • Speaking of REITs .. Acorn Project (Two) LLP, the Issuer of the Acorn Medium-Term Green Note (MTN) Program, closed the final tranche on 16th July 2021, raising Kshs 2.096 billion against the target of Kshs 1.438 billion representing a subscription rate of 146%.  As part of this transaction, the Acorn green bond was converted into the Acorn Student Accommodation Development REIT (ASA D-REIT). Read more.
  • The Architectural Association Of Kenya reported on development challenges within the Nairobi metropolitan area. A decade after an electronic construction-permitting system covering Nairobi, Mombasa, Kiambu, Machakos, Kisumu, Kajiado and Kilifi was deployed with the support of the World Bank Group, it is plagued by frequent disruptions and system downtime. In Nairobi, the system has not been operational for more than three months of 2021 and in a survey of AAK members, 46.7% of the respondents indicated that they had to wait for over 6 months for their applications to be processed or granted approval.
  • Kenya’s Lands Ministry is doing a digitization of title deeds through a National Land Information System (NLIMS), referred to as ArdhiSasa with a goal to have all land records digitized by the end of 2022.  The Lands Cabinet Secretary indicated that the Ministry has scanned and digitized 30 million documents in Nairobi.
  • A Cytonn Real Estate report on properties in the years 2020 found that “residential units in Thindigua, Syokimau and Rosslyn recorded the highest returns to investors and land asking prices recorded an overall annualized capital appreciation of 2.3%.” According to the report, Gigiri was the best performing office node in FY’2020, followed by Westlands and Karen, In the retail sector, Westlands and Karen were the best performing nodes while in hospitality, Westlands-Parklands was the best performing node. Read more in the report.
  • Cytonn is now doing a restructuring and has applied to wind down two funds – the Cytonn High Yield Solutions LLP and Cytonn Real Estate Project Notes LLP through administration and has invited creditors to submit their debt claims, with proof, to Kereto Marima who is the appointed administrator – by November 29, 2021.
  • Hotels are not doing well with many iconic sites closed or on sale due to Covid-19 and the resultant curfews and travel bans that have affected the flow of tourists into Kenya.
  • Many hotels expect a steady recovery once the curfew is lifted (which happened in October 2021). See a survey of hoteliers by the Central Bank of Kenya.

Some hotels that are gone: Intercontinental and the Nairobi Dusit/ D2 which recovered after the January 2019 terror attacks only to succumb in the Covid-19 aftermath.

Some hotels currently closed: Mt Kenya Safari Club, Norfolk, Radisson Blu.

Some hotels on sale: Outspan, Treetops (should the Queen buy the hotel ahead of her 100th birthday?), Fairview and Country Lodges, Jumuia (Nakuru).  

E-commerce insights from Jumia and Chap Chap Go

Yesterday Jumia released their Africa e-commerce index 2021 with some interesting trends, a  year after Covid-19 impacted lives across the continent.

Sam Chappate CEO Jumia Kenya said that in Africa, e-commerce still has room for growth as currently, it still accounts for just 1% of  transactions, and another 300 million people will be accessing the internet in two years. 75% of traffic to Jumia is on mobile, while it is 85% for Kenya.

  • Gross merchandise value has shifted – from 40% of pre-pandemic sales coming from everyday stuff (FMCG, beauty products) to now 60%. Now, a 2kg sugar bag is the top-selling product on Jumia in Kenya. 
  • NYSE-listed Jumia is in ten countries and Kenya number 2 in searches, behind Nigeria. Top cities in Africa are Lagos, Cairo, Nairobi, Casablanca, Abidjan, Gaza, Abuja and Accra.
  •  With 11,000 sellers and 1,600 pickup stations, Jumia has the biggest logistics infrastructure in Kenya. Coca-Cola is probably bigger but it’s a closed system whereas Jumia has opened their system and logistics infrastructure to third parties/partners (e.g. Premier Foods and Unilever). Small companies can use pickup stations for   FMCG.
  • Sales of Jumia are 51% primary cities, 27% secondary cities, and 22% rural – so 50% outside Tier-I cities. Most deliveries in Kenya are to Nairobi Mombasa and Kiambu.
  • Now big in fintech .. 35% of Jumia orders are paid through Jumia pay which has 4 million downloads – they have now opened Jumia pay to third-party partners, starting in Egypt.

Also, Chap Chap GO, an -e-commerce startup that’s winding down, uncovered some gems from its year of operations in Mukuru and Langata areas trading a limited basket of products. Its founder Soud Hyder, a digital commerce specialist, shared some urban e-commerce insights on Twitter.

  • Fastest moving items were wheat flour (Ajab), cooking oil (Salit), cooking fat (Samli), and then sugar – all needed on a daily basis by Mama Chapos (informal roadside cafes).
  • Ajab Flour was super interesting; it’s very popular with Mama Chapos despite being a relatively newer brand, they cited quality and texture for it being the preferred choice, something to do with the elasticity of the chapos and preferred kneading consistency by the cooks.
  • Samli was a product requested by customers, trialled with a small cohort in Jul-Aug 2020, mostly “Mama Chapo” type of customers.
  • GIL (manufacturer of AjabFlour) has a lower quality fighter brand called Umi, intent was to help them garner market share but turns out the premium brand is more popular even in the lower tier of the market, customers are willing to pay a bit more for quality.
  • The market has already validated the “measure and pour model” (weka ya kupima), unhygienic & inconvenient but the market has found equilibrium, works for both retailers and customers, an additional 3% margin is not bad at all for folks in informal retail
  • .. Mama Chapos ended up becoming our core customers because of on-demand service, fair pricing and convenience. We were not always the cheapest but the convenience aspect really helped them focus on their business.
  • We used a hub and spoke model, had small depots in the neighbourhoods we operated in .. the eventual goal was to partner with existing businesses/retailers that had storage space to spare and delivery capacity.
  • We mostly did two, Fresh Fri (B2C – middle class) and Salit (informal retail/kibandas), our B2C footprint was relatively small, so ended up doing quite a bit on Salit including repacking it in 1L reusable jars, see the cost of packaging easily adds 3-5% to the price.
  • Differences in margin is all about supply and buy planning (basis of commodity trading) and following market prices being set by the bigger suppliers/manufacturers, if they drop you have to drop otherwise you won’t move stock.
  • Flour and oil move every day so it’s a volume game and moving bulky items from depot to customer/market in the most efficient way possible, for those who are able to do it really well e.g. the Eastleigh wholesalers and some of the bigger distributors.
  • So FMCG margins are razor-thin in sub-Saharan Africa, pricing makes or kills a business, so wholesalers and bigger retailers make money from rebates in subsequent months, invest capital to build seed customers and retention, build volume for rebates, qualify for credit .. and build credit lines with manufacturers, that net 15 or 30 or 45-day credit line could easily get sub 10% margin, so not a bad hustle if one has all their ducks lined up, but it’s hard, not the easiest of businesses to run, so many things could go wrong
  • .. which is why you are seeing an influx of new oil and fats brands, if you crack distribution, you can carve out a niche. They call vegetable oil these days “Salad* after the brand Salit.
  • Primarily it’s a quality, price point and availability problem. So more on the distribution side, like milk ATMs, if you can plug a brand on top that and execute, even better
  • Unfortunately, we shut down our FMCG business in Q4-2021 and are formally shutting down @ChapChapGO .. we’ve become another statistic of a fledgling startup but hope the insights and lessons learnt will benefit and inspire others.