Category Archives: ESOP

KQ EGM 2017

Kenya Airways (KQ) held an EGM – extraordinary general meeting of its shareholders today in Nairobi. KQ Chairman, Michael Joseph opened the KQ EGM with a statement that this was essential to the future of the airline, as it restructured their debt and reduced their cash payments. He cited the origin of the airlines’ problem as the fleet expansion, ordering new planes back in 2005, that arrived later than expected, and soon after there were issues like terrorist attacks, economic decline, Ebola and the airport fire. This was at a time that there were a lot of state-owned Middle East airlines allowed to Nairobi who did not have a profit motive and who undercut their KQ’s prices.

KQ’s first Dreamliner arrives in April 2014

He said the board had made responses such as offloading some aircraft to leases till the situation improved and they had also hired Sebastian Mikosz as CEO, who is a turnaround specialist.

Excerpts from the KQ EGM and the hour-long Q&A with shareholders

The Michael Joseph factor: Shareholders seem to have a lot of faith in Michael Joseph as a person to lead the turnaround. This is because of his legacy at Safaricom; he himself admitted as much in the challenge ahead of him, but he said that turning around KQ was much more complicated than Safaricom.

Hot button issues:

What Went Wrong? When it’s not clear what happened, Kenyans typically assign blame to corruption or mismanagement and several shareholders ask about a forensic audit query that had been done at KQ. Joseph said they had not forgotten the forensic audit, and he was going to clean the airline; he said that action had been taken with staff several dismissed or in court (He said justice was slow in the country cited a case where the former CFO had sued the airline and that case had not been heard a year later).

Payment to advisors; This came up several times and the figure cited was Kshs 1 5 billion. Joseph said the payment was a lump sum figure for the many advisors engaged in the complex restructuring deals. He cited Mckinsey as one case he was not happy and which had been terminated. Others were international competitively sourced and they had negotiated them down but had to pay.

Management ownership and staff pay: Shareholders asked the board and management to show commitment, by becoming shareholders. Joseph said he was a big investor at Safaricom and the KQ restructuring had an employee share ownership plan (ESOP) as part of the ownership plan, while disclosures about directors shareholdings would be forthcoming. Another shareholder asked the board and management to take a pay cut in line with what was expected of other employees.

Role of Government: Joseph said that the Government had allowed many new foreign airline flights to Kenya and that whenever the president visited abroad, other presidents asked if their airlines can fly to Kenya, or the tourism minister allows them to fly tourists to Mombasa – forgetting about KQ. Part of their future engagement with government will be on licensing of other airlines. On a question about nationalizing the airline, Joseph said that this had been ruled out and that KQ would remain a public company.

Banks left out to dry: Some shareholders asked if the banks agreed to the conversion? Banks lend depositors money to get it back and not for shares – and do not take KQ’s problems to other banks where this will make us miss dividends. There is a court case brought by some banks that will be ruled on August 10.

Fleet and performance CEO Mikosz spoke about monitoring the perception created in media about delays and cancellation at KQ and which unfairly gave the airline a bad impression. He said that flying 160 flights per days you expect 2-5% are expected to have some delays and this was standard in the aviation industry, but their stats were good.

Minority shareholders: Several minority shareholders said they had voiced issues at past AGM’s about high ticket prices, low dividends, and other issues who had been ignored and who were told that the airline was alright. Michael Joseph said he was an independent director and he and others were there to look out for minority shareholders.

Shareholders at the KQ EGM unanimously voted for the lengthy balance sheet restructuring that was done in a single vote.

Another circular will be issued with terms for shareholders investing afresh in the airline.

The next meeting will be a regular shareholder’s AGM on September 21.

KQ EGM swag: transport to/from town, t-shirt, packed lunch by NAS.

KQ Capital Optimization: Government, banks, KLM, shareholders impact

Kenya Airways (KQ) shareholders have been asked to approve a balance sheet restructuring. They have known this day was coming for the last two years, but the KQ capital restructuring details will still be an initial shock to many of them.

The circular signed by Michael Joseph Chairman of the board cautions about the unsustainable debt levels at KQ and that the failure to restructure this, may lead to insolvency and closure. KQ’s Kshs 155 billion balance sheet has Kshs 113 billion of long-term debt and debt and 82 billion in current liabilities – resulting in negative 47 of KQ capital. The proposed deal will reduce the company debt by Kshs 51 billion and also unlock new funding. But this comes at a price and he cautions that minority shareholders will be significantly diluted, In this conversion of debt to equity, but they can still buy shares at a discount.

Excerpts from the 38-page shareholder circular (see investor documents) 

Individual shareholders:  Each ordinary share is being subdivided into 20 shares one of which is interim and 19 of which are deferred.

  • A KQ shareholder with 1,000 shares today will end up with 1,000 shares (initially they will be 250 shares) and 19,000 deferred shares. The ordinary shares will be listed on the NSE.
  • The deferred shares have no share certificate, carry no dividend or voting rights, and are not transferable (tradable). The creation of this class is to prevent an unlawful reduction of the company share capital.

Board restructuring: the Government shall have two seats on the board, while KLM will have one. The banks will have 1 director for every 5% they own (through KQ Lenders Co.). 2/3 of the board are to vote on new CEO & finance director appointments, and on partnership agreements, fleet plans, and strategy. The circular notes the changes will enable faster decision-making and less conflict at the board.

Shareholders Change:

  • Shareholding before: Kenya Government 29.8%, KLM 26.7%, IFC (9.56%), Mike Maina Kamau 4.3%, others 30%
  • Shareholding after: Kenya Government 46.5%, Kenya Banks 35.7%, KLM 13.7%, employees ESOP 1.9%, IFC 0.5%, Mike Maina Kamau 4.3% 0.2%, others 30%.
  • KLM and IFC significantly reduce their shareholding edit.
  • A new shareholders ESOP is proposed to be created and qualifying employees can buy up to 2% of the shares.

Shareholder Dilution: the existing Shareholders’ holdings of Ordinary Shares will be diluted by 95% as a result of the Restructuring and Employee Offer.

  • A shareholder with 1,000 shares will end up with 1,000 shares (initially they will be 250 shares) and 19,000 deferred shares.
  • The new shares will be consolidated after allotments are done i.e. mainly to the banks – so that meaningful trading can take place. (On completion, the company will have 7.4 billion ordinary shares and 28 billion deferred shares). KQ can’t also issue shares at discount to the nominal value, so a share split and an immediate consolidation will be done.
  • For an illustration of the dilution Mike Maina Kamau remains with 64.4 million shares but that shareholding, which was equivalent to owning over 4% of KQ, is now 0.22% assuming he does not buy new shares.
  • Shareholders can buy up to Kshs 1.5 billion of new ordinary shares, but new shares they buy are not tradable

The Government of Kenya: When he presented his budget speech earlier this year, Treasury CS Henry Rotich spoke of plans to restructure the KQ balance sheet in which the government could play a critical role and bring on board other stakeholders.

  • They had earlier provided Kshs 24 billion in loans that is being converted to equity
  • The government is will now providing in-kind contributions being the provision of government guarantees (not cash) of another 54 billion to US EXIM bank and Kshs 23 billion to Kenya banks.

KQ Capital and Kenya Banks: Kenyan banks are owed Kshs 23 billion plus interest, which they will convert to equity in a debt restructuring.,

  • Also, a group of Kenyan banks has agreed to provide Kshs 18.1 billion in new financing.
  • Eight Kenyan banks signed in on the deal on July 14.
  • Kenya banks have two options of how to participate – either to convert debt into equity or to subscribe to a new “Kenya Lenders Co” in a secured debt arrangement. If any Kenyan bank that has lent to the airlines does not indicate its preference, it is deemed to have accepted the equity route – but a majority has opted for the scheme. These novel agreements are part of the new companies act that allows companies to discuss distress debts with banks as long as 75% of creditors approve.
  • KQ Lenders Co. Ltd will be permitted to divest the Ordinary Shares it holds in KQ through the NSE and the sale proceeds will be used by MTC Trust Services to repay the Kenyan Banks loans;

KLM: will invest Kshs 7.5 billion through in-kind contributions of Kshs 2.7 billion, and will also subscribe for Kshs 5 billion (Kshs 2.5 billion of share in two phases) after settling some terms on employee number and aircraft leases.

  • Also, the recently criticized master cooperation agreement between KQ and KLM (signed in December 1995) shall be terminated.
  • KLM in-kind contributions include the slot (takeoff/landing rights) at London Heathrow currently used by KQ, and certain IT systems.

Don’t go to court: the circular warns that:

  • The key risk in relation to the Scheme is that creditors and other stakeholders dispute the process, which may result in delays or in it being unsuccessful
  • if the Restructuring is not implemented, there will be no amendments to any of the Existing Indebtedness and there will be no new money from KLM or the Government.

Way forward The circular from the Chairman notes that:

  • shareholders representing over 56% of the issued and outstanding Ordinary Shares have indicated their intention to vote in favour of the Resolution at the EGM. Such Shareholders include the Government and KLM.
  • .. Accordingly, the Board unanimously recommends all Shareholders to vote in favour of the Resolution to be proposed at the EGM as they intend to do in respect of the beneficial shareholdings of the entities they represent on the Board
  • Transactions are expected to be completed in August 2017, which includes the shareholders meeting (EGM) on August 7 in Nairobi and signatures from aircraft financiers and the banks.
  • 75% of shareholders have to vote at the EGM for the KQ capital restructuring to move forward.

KQ Capital Advisors: PJT Partners, Bowmans, White & Case (both legal), Kestrel stockbrokers, Redhouse, KPMG auditors, Deloitte (financial advisors), C&R Registrars. The exercise will cost about Kshs 25M with 9.8 million for lawyers and 14.4 million for transaction advisors

$1 = Kshs 103

Athi River Cement EGM

The shareholders of ARM Cement (Athi River Mining) will meet on  August 25 in Nairobi to approve the investment into the company by CDC Group (formerly Commonwealth Development Corporation), the UK government-owned development finance institution. CDC will become anchor shareholder who may contribute to stabling the company share price to the benefit of existing shareholders. 

ARM Cement Rhino

  • If shareholders allow the investment of Kshs 14.14 billion, and other approvals are received, CDC (through CDC Africa Cement) will own 37% of the company.
  • The IM document (distributed to ARM shareholders) notes that CDC, which previously the used to invest through third parties, resumed directly investing in African businesses in 2012 after  change of strategy – and now has stakes including 76% of Feronia (DRC), 70% of Globeleq Power, 31% of Garden City, 24% of GEMS Africa, 20% Africa Foods (Rwanda), 15% of DFCU (Uganda), 15% Miro Forestry (Sierra Leone), and 3.7% of Bridge Academies.
  • Shareholders will approve an increase of ARM’s share capital from 675 million to 960 million through creation of 285 million shares. As part of the deal, 353 million new shares will go to CDC and 90 million shares will go to the ARM employee share ownership scheme (ESOP).
  • The current largest shareholders are Amanat Investments and the ARM MD (Pradeep Paunrana) with 27% and 18% respectively and their stakes will reduce to 14% and 9% in this deal, while the ARM ESOP stake could go up from 4%  to 13%.
  • The ESOP is more like an executive compensation plan as most of the shares allocated since March 2007 are to the managing director, the deputy managing directors and other senior managers. Of the 90 million new shares, 55 million are reserved for the managing director, 10 million for a family member, 5 million for the deputy managing director and 20 million for other senior managers of ARM. The amount of share be allocated are conditional on ARM meeting certain targets calculated of minimum EBITDA ($44M in 2017,  $77M in 2019) and target EBITDA ($55M in 2017, $95M in 2019) [Note: The company lost lost ~$33 million before tax in 2015 down from a  profit of $20 million in 2014]
  • The deal will also include a payment of  $20M to reduce the debt owed to the Africa Finance Corporation, another $90M in debt payments, and $30M of capital expenditure.
  • Kestrel considers the Kshs 40 price to be adequate, but a chart in the IM shows that the share price has dipped from Kshs 80 in May 2015 to hang around Kshs 40 (or below) for all of 2016. On top of that, the new deal will dilute existing shareholders by another 43%.
  • The shareholders will also change the company name (from ARM Cement Ltd) to Athi River PLC and will vote to allow (i) board meeting to be held on phone, (ii) payment of dividends by mobile money (iii) annual reports to be published in newspapers or company websites.
  • The deal also includes reconstitution of the board to have 2 directors from the promoters (MD’s group) and 2 from CDC with other independent directors. CDC will get to sit on board committees for audit & risk, strategy & investments, HR and a new one called environment, social & governance to be formed as part of the CDC code for responsible investing.
  • Deal advisors are Tradeways, Coulson Harney, Kestrel, and Deloitte.

 $1 = Kshs 101

When Bankers own Banks

Managers and employees are often given a chance to become part owners in the banks. This ‘aligns their interests’ with the institutions and gives them an added incentive to help the institutions do better as it individually rewards them for the good performance. The incentives are usually facilitated through employee share option schemes (ESOP’s) which convey some tax benefits and discounted buying prices. Typically, in conventional ESOP’s,  there a general pool for all employees and another for senior managers.

The method of calculation and award of these benefits is done in secrecy, usually by board committees. This is to ensure the privacy of employees and security of their families, but one outcome is that any revelation of these perks sparks a lot of interest.  In fact, you sometimes find a higher level of disclosure of compensation practices at listed banks in Uganda and Rwanda, than you do with Kenyan ones.

Stanbic Uganda compensation guide

Consider these examples:

CBA: Shareholders include a ESOP who own 2.5%.

Chase Bank: Employees of the bank own  4.3% of Chase through an ESOP. Elsewhere a bonus to the former chairman was one of the deals that the auditors queried in 2015.

Cooperative Bank: Stories about shares to bank management and directors first surfaced in 2008, ahead of the IPO in which bank staff got 9% of the shares. and has been on twitter this year. The company’s accounts show that the CEO owns 2% and the bank links the story to a smear by a former CEO who has an ongoing tax case with the bank.

Equity Bank: CEO owns 4%, while an employee ESOP owns about 3%.

Jamii Bora:  The CEO own 1% and is also an investor in the largest shareholder of the company.

Family Bank: In 2011, shareholders voted in an ESOP for managers and a transfer of 1 % transfer of shares of the (then-new CEO , which he purchased at a discount as part of his employment package.

Housing Finance: Has has an ESOP since 2006 that’s open to  all employees: Eligible employees pay for the units by cash at a price determined by Trustees either in full or by instalments until price is paid in full. The Unit holder is not allowed to sell, transfer or otherwise dispose of Units registered in his name to another Unit holder or to any third-party whatsoever.

KCB:  When KCB CEO Joshua Oigara declared his wealth (assets of Kshs 350 million comprising land, buildings, motor vehicle, cash bank balances and shares) and salary (with allowances that totaled  Kshs 4.9 Million a month),  last year his statement added that  “..My public declaration is driven by the need for us as private sector players to initiate greater transparency. Kenya is bleeding from corruption mainly driven by secrecy in organizational operations..”

$1 – Kshs 101.

CDC Group buys Kenya’s ARM Cement

We now have more details now about the CDC purchase of ARM Cement.

  • CDC African Cement (CADAC)  (registered in Guernsey), wholly owned by CDC Group, will pay Kshs 40 per share for 353.7 million shares – an amount of Kshs 14.1 billion  (~$139 million) to acquire $41.66% of ARM.
  • Shareholders will have to vote to increase share capital of ARM.
  • CADAC will also enter an agreement with Pradeep Paunrana (ARM’s CEO) and Amanat Investments (the main family shareholding)  (who owned 46% of the company, prior to the CDC investment) to vote in concert with CDC.
  • ARM also has to get its lenders and employees to sign on (The Employee Share Ownership Plan – ESOP had issued 21 million shares and owns about 4.6% of ARM).
  • The CADAC statement indicates they don’t intend to takeover the company, but there’s no comment on if future plans may include a delisting of ARM, which has cement operations in Kenya, Rwanda, Tanzania and South Africa.
  • The deal is planned to be complete by July 2016.

$1 = Kshs 102.

ARM shares are trading between Kshs 36 – Kshs 37.