Category Archives: Corporate governance

Government Guarantee to Kenya Airways and Shareholding Increase

Today the Kenya government signed guarantee deals to secure Kenya Airways (KQ) continued financial support from EXIM Bank US, and a consortium of Kenya banks and also converted its debt to more equity, significantly altering the ownership structure of the airline.

The Government had advanced loans of Kshs 4.2 billion and $197million to KQ, and the debt conversion will see a 19.1% increase in their shareholding. Aside from, that Kenyan banks, which were owed $217 million, received a 38.1% shareholding in KQ in exchange for $167 million of that debt.

The $267 million government debt and bank conversions are part of a series of complex restructuring deals. The resultant shareholding of KQ will be Kenya Government 48.9%, Kenyan banks 38.1%, KLM 7.8%, and other shareholders will have 5.2%, after a  massive dilution that shareholders approved at an EGM in August 2017. Not all bank and all government debts were converted as that would have seen the government stake go above 51% and they wanted KQ to remain a private company, not a state/parastatal one. The restructured board will comprise 3 directors from the Government, 2 from the banks, and KLM will have 1 representative.

Treasury Cabinet Secretary Henry Rotich said that the guarantee and restructuring by the government was not a bailout and the Government expected repayments of dividends from KQ within the next decade. The Government had been faced with two options with regard to KQ one of which (folding the airline) it could not pursue, and it chose the other, to support the airline, for which, the Cabinet confirmed through an independent business case study by the Seabury Group, that the airline could, through shareholder support, be turned around and have a viable future. He said the capital optimization would enable the airline to trade on its own balance sheet.

Transport Cabinet Secretary James Macharia said that aviation sector, led by Kenya Airways,  contributes 10% to Kenya’s GDP and was a central engine that supports other economic activities like investments, horticulture, and tourism. Also by having a strong KQ, this would strengthen the case to make Nairobi’s JKIA airport a regional hub and his Ministry was in the process of finalizing plans to add a second runway and expanding existing terminals to enable the airport to serve 12 million travelers a year.

The bank shareholding will be through KQ Lenders Co, a special purpose vehicle that will be managed by Minerva Fiduciary Services of Mauritius and the agreement was signed by Madabhushi Soundararajan a career-banker, as director.

Safaricom CEO Leave and Impact

Safaricom is not expected to undergo major changes or see much impact following the shock statement released this week about CEO Bob Collymore leaving the company for a few months to undergo medical treatment.

“During this time, Sateesh Kamath, the current Chief Financial Officer for Safaricom who is also Mr. Collymore’s alternate on the Board, will take a primary role.  He will be supported by Joseph Ogutu who is the current Director – Strategy and Innovation, Safaricom. Mr. Ogutu will be responsible for Safaricom’s day-to-day operations until Mr. Collymore’s return from medical leave.

Following the news about the CEO’s leave, the Safaricom CFO had a session with investors, and according to a Citi report afterwards on the implications of the events:

We have no concerns over operations of the company in the CEO’s absence. Based on examples in other geographies, it would take a couple of years to derail a well-run company.The company may become exposed on the regulatory side. We think the regulation is likely to remain balanced with consideration of the contribution the company makes to the state (in taxes and dividends)

The discussion about succession and its impact at Safaricom comes exactly seven years after Collymore took over from Michael Joseph as CEO. He then made his formal debut announcing the half-year results back then, and that event will recur again tomorrow (Friday) when Safaricom releases its 2018 half-year results. Also at the results announcement, updates will be given on the e-commerce plans and international expansion of the M-pesa platform.

CFO Kamath with CEO Collymore and Chairman Nganga at the Safariom 2017 results announcement in May.

At the announcement of another year of record 2017 financial results announcement in May this year, company chairman, Nicholas Nganga announced that the expiring contract of Collymore had been extended for another two years. No interim CEO will be appointed at Safaricom, Collymore came to Safaricom from Vodafone, but an appointment of a CEO is one of the governance clauses that changed with the Vodacom buyout of Vodafone’s interest in Safaricom in the middle of the year.

The Safaricom Sustainability Report for 2017 which Collymore launched a month ago, noted that the company’s shareholding had experienced a decline in local and retail shareholders due to their profit-taking from the company’s high share price and a corresponding increase in investment stakes of foreign corporate investors due to Safaricom’s performance and strong fundamentals.

Arsenal Football AGM

Yesterday, Arsenal Holdings, parent of Arsenal Football Club held their annual general meeting (AGM) at Emirates Stadium, London. There were news reports about some tense moments and here a full recap of the AGM

Here’s a peek at their latest 67-page annual report (PDF)  for the year ended, 31 May 2017.

For 2017, Arsenal income was £432 million (up from £353M the year before) and this comprised £100 million from match day revenue (26 home games had average ticket tales of 59,886), £198M from broadcasting, £90M from ‘commercial’, £26M from retail and £7M from player trading.

Group profit before tax was £44M in 2017 up from £3M and the tax charge for the year was £9 million up from £1.2M. This was at a tax rate of 19.86% and this will go down to 17% from April 2020.

Arsenal Assets and Achievements in the last 5 years.

Over five years, turnover has gone from £280M to £424M and profit after tax from £4.9 million to £35.2M. Over the same period, net assets have gone from £302M to £363 M and fixed assets are now £618M (up from £572M in 2016)

Operating expenses were £371M including £199 million on staff, £79M on other, expenses and £77M on amortization of players, (the increased amortization charge is a direct result of a record level of investment into the Club’s playing resources). Led by the acquisitions of Granit Xhaka, Shkodran Mustafi and Lucas Perez the Club invested £113.9 million in acquiring new players and to a lesser extent extending the contracts of certain existing players, for example Hector Bellerin).

Arsenal staff payments totaled £199M in 2017 to 695 employees who comprised 75 players, 117 training staff (the development of our own players through our academy remains a priority for our football club), 395 administration staff and 112 ground staff.

In 2017 Arsenal paid £111M for players compared to £66M the year before and received £9M (compared to £12M in 2016). The Club was fully compliant with the Premier League’s wage cap/short-term cost control regulations – The ratio of total wage bill to football revenues was reduced to 47.2% (2016 – 55.7%).

Arsenal directors earned £25,000 per year, but the total payment to directors was £3M with I. Gazidis (CEO – £2.6 million) and K. J. Friar (Club Managing Director – £664,000) earning the bulk, as one director, Lord Harris of Peckham, waived his director’s fee and donated it to charity. The accounts were audited by Deloitte who also earned £25,000 for this report.

The report lists highlight of the year;  how they did in tournaments, a win percentage of 63% (up from 52%,) and names individual players, goal scorers, and some transfers (we secured Sead Kolasinac and Alexandre Lacazette, our two primary targets for this transfer window)

Risks: These include the adverse impact of competing in the UEFA Europa League (they missed out on the 2017/18 Champion league), which is forecast to be £20 million. The full financial impact will depend on a number of factors including the actual progress made in the competition, as this impacts both performance and market pool distributions from UEFA. The Club has previously fully self-insured against a season’s participation in the UEFA Europa League within its cash reserves. Another risk highlighted in the annual report is from BREXIT the Group is monitoring the impact of the UK’s decision to leave the European Union. This weaker pound against the Euro has already made it more costly for them to get players from the European Union, but that the greatest risk is from an economic downtown in Britain which will affect their revenue from broadcasting and sponsorships.

Finances: Arsenal has approximately £200 million of debt most of which is long-term and which mature in over 5 years. For 2017, the fixed bonds were at 5.8% and the floating ones at 7.0%. As part of its bond covenants, Arsenal has to maintain a certain amount of cash in the bank – and had £103 million in 2017 (compared to £117 million in 2016). They owe £47 million from recent player transfers. Finance charges in the year were £14M, which included bond repayments of £11M. Arsenal has exposure to the Euro and the US dollar on currencies and uses interest rate swaps for its bonds.

Subsidiaries & Investments: The Arsenal group has about 20 subsidiaries in which they own 100% of and which are used to manage areas like property development, retail operations, ladies football, stadium operations, and data management. Arsenal has also invested £20 million in a company that runs the club’s portal – Arsenal.com has 25 million unique visits a year; the club has 10 million Twitter followers with 9.6 million others on Instagram.

Partnerships: Their main partnerships are with Puma and Emirates. During the year, there was an increase in commercial revenues of £10.3 million, driven primarily by secondary partnerships. There’s no mention of deals in Kenya, which may include Sportpesa and Wadi Degla.

Edit: On November 17, Arsenal welcomed WorldRemit as its first-ever official online money transfer partner. The partnership will support WorldRemit’s growth ambitions by helping them reach Arsenal’s 74 million followers on their official social media channels and 185 supporters’ clubs worldwide.

For Investors:

  • Over a five-year period, earnings per share have gone from £78 to £567 per share. There are 62,217 shares issued.
  • The ultimate parent of Arsenal is KSE UK (which owns 67.05%) which is wholly-owned and controlled by E.S. Kroenke.
  • The directors do not recommend the payment of a dividend for the year (2016 – £Nil).
  • See this on buying shares in Arsenal football club.

State of Kenya’s NSSF

Kenya’s National Social Security Fund (NSSF) published their financial accounts in the newspapers last week after they were earlier gazetted.

The Kshs 174 billion statutory fund, had income in the year to June 2016 of  Kshs 10.7 billion which was down from 19.3 billion the year before. The was after the fund received 12.8 billion of contributions from members (up from 11.7 billion) and paid out 3.1 billion. They had investment income of Kshs 12.8 billion, and paid administrative expenses of Kshs 5.5 billion leaving a surplus for the year of  Kshs 5.2 billion, and which was down from 13.2 billion in 2015.

In terms of assets, they have quoted shares of Kshs 49 billion (down from 57 billion in 2015), treasury/infrastructure bonds of 52 billion, 8.9 billion of corporate bonds, undeveloped land of 9 billion and buildings/ land of Kshs 19.9 billion.

Top shares in the NSSF Kshs 49 billion quoted investments portfolio include 25 million EABL shares (worth 6.9 billion shillings), 320 million Safaricom shares worth 5.6B, 116 million Britam worth 5.6B, 185 million KCB shares worth 6.2 billion, 88 million Equity Bank worth 3.4 billion, 3.2 million BAT worth 2.6 billion and 56 million Bamburi Cement shares worth 9.6 billion. NSSF also owns 24 million EAPCC shares worth Kshs 868 million and 148 million National Bank (NBK) shares worth 1.4 billion.

In the 1990’s the fund was sold illiquid plots at inflated prices and in the 2000’s, it deposited some funds in shaky banks that collapsed soon after. They still have a few issues with land, and the undeveloped land assets of the NSSF include 3.2 billion worth of plots at Mavoko and a Kshs 3.5 billion plot on Kenyatta Avenue in Nairobi.

The NSSF accounts were audited, by the Office of the Auditor General of Kenya (OAG) who qualified the accounts of the fund owing to some issue including

  • Unremitted contributions; A sample of 20 employers found that they had not remitted Kshs 755 million of deductions to the NSSF.
  • Another 764 million of contributions were held in suspense accounts.
  • Hazina Plaza/Polana Hotel Mombasa had rent owed to the NSSF of 239 million.
  • Milimani Plots at Kisumu where a Kshs 178 million estate that brings no income.

Other issues flagged included:

  • The stalled Hazina Trade Centre in Nairobi, which remains 38% complete with construction having been halted after Nakumatt Supermarkets who have a branch in the building had refused to give the contractor (China Jiangxi) access to the basement where they were to provide reinforcement to pillars of the building. The OAG recommended that the NSSF take legal action against Nakumatt in order to complete the Kshs 6.7 billion construction.
  • NSSF new rates

    NSSF budgeted income for the year was  Kshs 44 billion, but only 10.8 billion was raised; This was partly due to poor performance of the portfolio of shares listed at the NSE, but also due to non-implementation of changes to the NSSF act which would have seen increased contributions from members into the scheme.

  • Illegal transfer of a plot of land from the NSSF to Kenya’s Judiciary, and works at Nyayo estate at Embakasi.

$1 = ~Kshs 100

Septuagenarians and Auditor Changes on Kenyan Boards

Last week brought news that Co-Operative Bank had a new Chairman – John Murugu, who has previously worked at Treasury and CBK, is to take over as chairman on October 1, 2017, replacing Stanley Muchiri who is retiring after attaining the mandatory age of 70. 

The age of seventy as a cap for directors to serve on corporate boards has been paid lip service, until recently. But this year has seen prominent septuagenarians (70+ years) exit from financial firm boards including Peter Munga as Chairman at Equity Bank Group, Francis Muthaura as Chairman of Britam Holdings and now Mr. Muchiri who joined the board of Cooperative in 1986 and became Chairman in 2002. There could even be one more at Centum Investments with regard to top shareholder and director, Dr. Chris Kirubi who is also a former Chairman of the firm.

Dr. Kirubi was re-elected to the board in 2015, but the Centum AGM next week, where three other directors – Dr. Jim McFie, Henry Njoroge, Imtiaz Khan, all retire from the board, has an oddly-worded resolution – “Director above the age of 70 Years”  Pursuant to paragraph 2.5.1 of the Code of Corporate Governance Practices for Issuers of Securities to the Public 2015, to approve the continuation in office as a Director by Dr. Christopher John Kirubi, who has attained the age of seventy (70) years, until he next comes up for retirement by rotation.

Section 2.5.1 of the Capital Markets Authority (CMA)  Code of Corporate Governance Practices for Issuers of Securities states that it is desirable for board members to retire at the age of seventy years. Other changes in the code which are now been enforced more strictly include:

  • The Board shall rotate independent auditors every six to nine years (this is now  happening at some banks that have had the same auditors for more than a decade),
  • Auditors now narrate in the annual report to shareholders on key audit matters they encountered the company.
  • The status of Independent directors shall be checked annually, and they must not be associated by way of being an advisor to the company, or having a relationship – business or personal, with major shareholders or have cross-directorships with other directors.
  • A director of a listed company (except a corporate director) shall not hold such position in more than three public listed companies at any one time.
  • Independent directors can’t serve for more than nine years.
  • That a comprehensive independent legal audit is carried out at least once every two years by a legal professional in good standing with the Law Society of Kenya.
  • The Chairperson must be non-executive and not involved in day-to-day running of the business ( e.g. there wide expectations that Michael Joseph would play such a role as Kenya Airways chairman).
  • Publication of director resignations in the newspaper.
  • More engagement with institutional investors and media.