Category Archives: Kenya privatization

National Bank Responds to KCB Takeover Bid

National Bank of Kenya (NBK) has published a circular over the proposed takeover by the KCB Group.

KCB has also now published their own circular for NBK shareholders, that has been approved by the CMA and which details their side of the deal.

NBK Circular Highlights:

  • The board of NBK recommends shareholders approve the Kshs 9 billion deal even though they value their share at Kshs 6.10  as no competing offers have been received so far, and the bank, while strong, needs additional capital to meet regulatory capital and grow its business. They add that the Government has a policy of sector consolidation to create strong banks.
  • NBK is the thirteenth largest bank in Kenya, a Tier-2 bank.
  • KCB has proposed that NBK continue to operate as a separate subsidiary of KCB for two years during which there will be no staff changes. An integration will come after, along with an organizational structure review, which may lead to a reduction of the workforce and “optimization” of the distribution network. i.e. branches, ATM’s and agents. NBK has 1,356 staff, serving about 650,000 customers.
  • Deal a foregone conclusion?: After the re-designation of the preference shares, NBK’s two key shareholders, the Government of Kenya and National Social Security Fund own a combined 93.23% of the bank’s shares.
  • KCB valued NBK at Kshs 5.6 billion. NBK has 48,987 shareholders who will receive 147,383,968 ordinary shares in the share capital of KCB, equivalent to approximately 4.59% of the share capital of KCB.. The NBK Board appointed Standard Investment Bank (SIB) to independent advise them on the market value of NBK and SIB arrived at a fair value for each NBK share of Kshs 6.10 – the result of combining the dividend discount method (5.41), net assets multiple (6.62) and historical share trading price (5.01).
  • Listing history: NBK was wholly owned by the Government until 1994 when it sold by 32% to the public through a listing on the NSE, followed by another share sale in May 1996. One of the conditions of the KCB offer is that the NBK shareholders should approve the de-listing of NBK from the NSE.

The NBK board’s opinion on the bank’s valuation is not expected to change anything unless a competing bid materializes – and the deadline for that is July 17.

KCB’s Circular to NBK Shareholders:

  • KCB has invited NBK shareholders to accept their offer by completing and returning forms during the offer period that runs from 10 July to 30 August. If the deal succeeds, their new swapped shares will list on September 16. 
  • On the pricing, NBK traded 26,638 shares per day in the last 6 months. In the last three months, NBK share prices ranged from Kshs 4.3 to 4.5 while those of KCB ranged from Kshs 38 – 44.
  • KCB reserves the right to vary the terms of its offer up to 5 days before the closing date (which means they have a chance to improve on any competing offer).
  • If 75% of NBK shareholders accept the offer, the others will remain minority shareholders in an unlisted (NBK) company, but if over 90% accept, then KCB will move to compulsorily acquire the remaining shares of other NBK shareholders.
  • KCB notes that NBK’s loan book has a non-performing ratio of 49%. 
  • Any share amounts that convert into fractions of a share in the swap formula will be rounded upwards to a full share.
  • There is a long-stop date of Thursday 31 October, 2019, and if the deal is not concluded by then, the KCB offer will lapse, and all acceptances will be considered void.

KWAL at 50

This week, Kenya Wine Agencies Ltd (KWAL) celebrated fifty years of business. At a Nairobi dinner event to mark the occasion, KWAL Managing Director, Lina Githuka, said that the company, which had been privatized four years earlier, had renovated its portfolio and improved its operation. These had resulted in volumes going up threefold and, with profits up ten times, had set the stage for a second round of privatization.

During the event, there were clips and narrations showing the history of the companywhich was established in 1969 by the Government of Kenya to bottle wines and spirits. initially, and up through the 1990s when Kenya’s economy was liberalized, KWAL had a monopoly to import leading international brands like Martell, Hennessy, Bacardi and Campari which they worked with local business owners to distribute to hotels and shops. Later in the 1980s, they opened a commercial winery and embarked in the manufacturing, process and bottling of local wines. While grapes are not easily obtainable here, they used other fruits, starting with pawpaw from Kakamega and later Pekera, and “Papaya” became the first domestically produced wine in Kenya. They later added variants based on passion fruit (Passi Flora), strawberries (Kingfisher), and apples (Woodpecker).

KWAL, under KWA Holdings E.A, is now a subsidiary of Distell, which owns 55% of the company after acquiring a 26% stake in April 2017 for Kshs 1.1 billion.  The company produces 20 brands locally including Kingfisher for the last 36 years, and through its partnership with Distell, also distribute many top international brands. The KWAL portfolio includes Yatta juices, ciders (Savanna, Hunters, Kingfisher) wines (Nederburg, Drostdy-Hof, 4th Street), Amarula, and Viceroy.

Distell reported that Kenya had a stellar year (in 2018) with volume up 32% and revenue up 27%, which was partly attributed to the impressive performance of local brands like Kibao and Hunter’s Choice. KWAL plans to open a production facility at Tatu City, near Nairobi, their first new manufacturing plant in two decades, at a cost of Kshs 3 billion to meet the demand of fast-growing brands.

Kenya’s Cabinet Secretary for Industrialization, Peter Munya, who was the chief guest at the event,  said the Government was prioritizing value addition and local content in investments and that the Cabinet had recently approved an investment policy to legally safeguard all the incentives offered to investors. He applauded the privatization process which had rejuvenated KWAL, and he hoped this would extend to the sugar sector where private companies were doing very well, unlike the Government-owned ones.

Kenya Airways 2018 results

Excerpts from the announcement of the Kenya Airways 2018 financial results April 30, 2019 at Ole Sereni Hotel. Nairobi at a breakfast event with investors and media.

Performance: 2018 revenue was Kshs 114 billion (~$1.14 billion), compared to 81 billion in 2017 at the airline, which is in the middle of discussions about taking over the management of the Jomo Kenyatta International Airport (JKIA) under a public-private partnership (PPP).

Chairman Michael Joseph said 2018 had been a challenging year, one highlight of which was the launch of non-stop daily flights New York, but there was a lot media scrutiny on PPP on JKIA that was wrong and excitable. He said that the airline was on the right path and thanked the staff for doing a great job under difficult circumstances.

CEO Sebastian Mikosz said this was the second year of growth in passengers and cargo and a narrowed loss. The difference to 2017 (which was abbreviated to 9 months as the airline changed its financial year-end to match IATA and its financial partners) was stark but the CEO went out of his way to compare unofficial twelve month numbers for 2017 to highlight that the airline had increased income, and flown more passengers despite the smaller fleet in 2018. They had 13,258 daily customers (up from 12,484),  a cabin factor of 76% and on-time performance 79%.

They earned Kshs 95 billion from flying 4.84 million passengers in 2018, Kshs 8.5 billion from cargo 8.5 billion and earned Kshs 10 billion from other business including ground handling and repairs and maintenance and training,. While the revenue covered their fleet ownership, fuel and staff costs, they ended with an operating loss of Kshs 683 million and, an overall loss before tax of Kshs 7.5 billion ($75 million).

Fuel: Accounts for 40% of costs, and as prices went up 30% in 2018, it remains one of the biggest challenges to profitability. As such they are going back to fuel hedging as a risk minimization strategy.

Fleet: They are getting back two Boeing 787’s from Oman Air but have extended an ongoing lease with Turkish to retain three Boeing 777-300’s which are simply too large to operate given the current loads and will introduce a complexity  that is not desirable now.

Routes and Partnerships 
  • The New York direct flight route had flown 15,000 passengers as of December 31 2018. The load factor is 64% and CEO said that there was nothing lucrative about NYC but it helped serve the Africa Market with 5 weekly flights which they will adjust back to being daily flights in the summer. The non-stop route offers the fastest route between New York and Indian Ocean destinations countries like Mauritius
  • The Air-France-KLM joint venture is still the biggest part of their business. They have now added one with Delta enabling KQ to sell flights to Delta destination cities beyond New York.
  • UN: With the addition of Geneva (and Rime) in June, they will now fly to all the main UN cities – Geneva, Mogadishu, Paris, New York – from Nairobi, completing their UN network.
  • JamboJet: They are trying to pushing to get their Jambojet subsidiary IOSA-certified so they can codeshare on more local routes.

African Aviation: The results presentation showed comparisons to Rwandair, Ethiopian, Turkish, Ethiopian and Emirates airlines, but Mikosz said that KQ was the only airline interested in growing the Nairobi hub. The CEO cautioned that while in 2010, Ethiopian was the same size as KQ, today it was three times bigger, and that was due to support systems, Also that Rwandair, while considered small today, will catch KQ in five years unless KQ grows its hub in this competitive environment.

PPP: The fate of the public-private partnership proposal for the airline to manage JKIA is still with the Privatization Commission who turned it over to Parliament for public hearings that were stormy at times and led to a lot of inaccuracies. The CEO and Chairman said it was not necessary for the growth plan that the company had presented to shareholders during their 2017 restructuring, but it was one which would accelerate its rate by levelling the playing field with its continental peers.

Kenya Government seeks Investors for Consolidated Bank

The Government of Kenya has invited local or foreign investors to buy a stake in Consolidated Bank. This comes after shareholders had approved an increase of the authorized capital of the bank by Kshs 3.5 billion through the creation of 175 million redeemable cumulative preference shares which will be allocated to the new investors.

The bank was ranked 30 out of 40 in terms of asset size at the beginning of the year.  Kenyan banks have been impacted by interest rate caps, more so small banks, and Consolidated has also been limited by its capital base which was Kshs 594 million at the beginning of the year. As at September 30 2018, the bank had Kshs 12.6 billion in assets, with Kshs 8.3 billion in deposits and Kshs 7.9 billion of loans.

The Government owns 85% of Consolidated through, stakes were previously partially owned by the Deposit Protection Fund, and through entities including Kenya National Assurance (2001), Kenya Pipeline Company, Kenya National Examination Council, Telkom Kenya, National Hospital Insurance Fund and LAPTRUST Retirement Services. The institutions had deposits in several banks that collapsed in the 1980’s  – such as Jimba Credit Corporation, Kenya Savings & Mortgages, Citizen Building Society, Estate Building Society, Estate Finance Company of Kenya, Business Finance Company, Home Savings and Mortgages, Union Bank of Kenya, and Nationwide Finance Company – and which were then “consolidated” into one restructured bank.

The Government had earlier injected Kshs 500 million of capital into the bank and appointed a transaction advisor in May 2018. Bidders are to register their details and submit their expressions of interest by email before the deadline for tenders on January 23, 2019.

Ethiopia privatization window opens

Several weeks of rapid news has seen Ethiopia privatization of state enterprises proposed as one of several changes to sustain what has been one of Africa’s fastest-growing economies. This all comes in the wake of a new era under Ethiopia’s new prime minister, Dr. Abiy Ahmed Ali, who is leading change within the country and outside, such as on his recent visit to Kenya.

In the last few days the Ethiopian government has lifted a state of emergency, signaled an effective cease-fire with Eritrea, released long-jailed political prisoners, reshuffled security leaders, launched e-visa’s for all international arrivals with a view to dropping visa requirements for all other African nationals, and opened the Menelik palace to tourists among other changes, which have drawn comparisons or Abiy to Mikhail Gorbachev in Russia in the 1980’s.

The surprise was statements about plans for the massive Ethiopia privatization program in which the government would sell minority stakes in roads, logistics, shipping, and prime assets like Ethiopian Airlines, which just took delivery of its 100th aircraft, a Boeing 787, and which is the centrepiece of a logistical, tourism and business hub plan for the country. The program would also extend to two sectors that have been off-limits to foreign investors up to now;  banking and telecommunications.

For comparison, a 2012 list of Eastern Africa’s largest banks had the Commerical Bank of Ethiopia as the largest in the region followed by National Bank of Mauritius and KCB in Kenya, and at last measure (2017) had about  $17 billion of assets, 1,250 branches, and 16 million customers. And in telecommunications, Ethio Telecom, a government-owned monopoly has about 20 million customers in a country with a population of 107 million (many of them children), but still a low penetration rate. 

Ethiopia privatization of state enterprises is not a new item, but it is one which the government has put side as it pursued an industrialization model that has seen the building of new infrastructure, new factories, industrial parks, agro-processors, leather parks, vehicles manufacturers etc. but which has not been equally felt by the country’s large and young population – and this has seen wide-spread protests and a state of emergency that ushered in a new leadership with a new prime minister (Abiy). 

It also came after a lengthy story in the FT – Financial Times on the state of Ethiopia’s economy which cited the fatigue that China has with large investments and some projects that are operating below capacity coupled with the high government debt and shortage of foreign currency  – Two investors said that Sinosure, China’s main state-owned export and credit insurance company, was no longer extending credit insurance to Chinese banks for projects in Ethiopia as willingly as it used to. It notes that imports into the country are four times that of exports from  Ethiopia leading to the shortage of foreign currency.

The changes in Ethiopia could also be a warning to other African counties that have been moulded in a similar way to Ethiopia model, with heavy borrowing from China and building infrastructure and mega-projects for the future.  When the Ethiopia privatization program starts it’s unclear who will benefit and if Chinese companies will be given priority given that they have invested for a long period in Ethiopia compared to other new companies, such as Vodacom and MTN, who are excited about the prospects that are now opening up