Category Archives: McKinsey

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.

Kenya Airways Restructuring Update

Yesterday Kenya Airways had a press conference with new Chairman Michael Joseph and outgoing CEO Mbuvi Ngunze. They spoke of restructuring changes happening at the company some of which included:

  • CEO search: Kenya Airways has listed between 15 and 18 candidates for CEO position, from all over the world. Shortlist will be 3-4 for final interviews (Via @wgkantai)
  • Challenges with staff. During the restructuring, some engineers have left KQ to work for Middle-East carriers. Crucially, the Chairman now seems to agree with the CEO on the need to revisit talks with the pilots union and to enhance staff productivity during the restructuring.
  • The contract with Mckinsey consulting is being wound down. It had been criticized for being very expensive. Many of the restructuring initiatives under the airline’s Operation Pride for revenue generation and cost saving were formulated by KQ staff and are being implemented by KQ staff, and hence the consultants’ time is over. Mr. Joseph said that this restructuring plan is now 55% complete.
  • KLM partnership:  The chairman defended the joint venture between KLM and KQ which some of the airline’s critics, especially its pilots, a claim was to the airline’s disadvantage. “Right now KLM is the best partner for us in terms of the route structure. The benefit is to KQ because KLM flies more routes and sells more tickets. We get revenues from the countries we don’t fly to into the joint venture. In the end, we benefit
  • The Chief Executive of KLM resigned from the KQ board and was replaced by Jos Veenstra who is a chartered accountant and is currently the VP Mergers Acquisitions and Holdings for Air France/KLM, and who has ben alternate director at KQ. It does not appear to be related with the restructuring. (via Capital FM)

Coop Bank 2016 AGM

Co-operative Bank of Kenya (Coop) had its 8th AGM (since listing) on Friday 27th May, at Bomas, in Nairobi. At the end of 2015, Kenya’s 3rd largest bank had 342 billion in assets, and profits of Ksh 15 billion. It had Kshs 208 billion in loans and Kshs 265 billion in deposits. The CEO also mentioned that Q1 profit in 2016 was almost Kshs 5 billion and they hoped to attain Kshs 20 billion by the end of 2016.

Highlights

  • Soaring Eagle: The CEO gave an update of  the ongoing transformation project that seeks to improve Co-op’s efficiency and services to the 5.9  million customers of the Bank. Now, only 25% transactions are done at branches, as customers  have the choice to use other channels like mobile phones, ATM,s internet, or bank agents. Internally, staff are tasked to cross sell bank products & open accounts, and they receive promotions, bonuses, and increments based on KPI’s and appraisals. They consulted with McKinsey for some of this.
  • Regional Expansion / Subsidiaries & Associates: They own 60% of Kingdom Securities (stockbrokers), and in South Sudan they own 51% of Coop Bank there, with the government of South Sudan owning the other 49%. The bank went from a loss of Kshs 687 million to a pre tax profit of Kshs 850 million, and the CEO said that Sudanese see the bank as their own, as they have a stake a board and management are local. They plan to use the same joint venture approach to take Coop Bank to Ethiopia, another large closed banking market. They also own 100% of Co-op Consultancy and Co-op Trust Investment Services, 35% of Cooperative insurance (parent of the listed CIC insurance) and 31% of CIC South Sudan.
  • Shareholders: The bank has almost 96,000 shareholders who will each receive Kshs 0.8 per share in dividend – and this will total Kshs 3.9 billion in 2015 (up from 2.4 billion). The bank Chairman said that they had to maintain a balance with the dividends paid out so that they they did not have to call on shareholders to put money back in to the bank as it grows. Coop shares were issued after a 2008 IPO at Kshs 9.5, and now trade at 18.3. They have also issued  bonus shares (twice?).
  • Elections: During the shareholder election, the CEO explained two unique points. One was that Coop Holdings which owns 65%  of the bank, had already had its AGM and nominate 7 directors (that they are entitled to) and merely forwards the names to the Bank for endorsement at the AGM. Second was that the CMA now requires that companies make shareholders aware that they have audit committees, and to have shareholders vote for the members of the audit committee at the AGM.
     Chami meets CEO

Q&A

  • One Shareholder asks about the cost of banking saying that If he deposits Kshs 100 at an agent, Kshs 20 is cut, and there’s another Kshs 50 for each of his ATM withdrawals. The CEO they share these fees with the agents who have to pay for costs like electricity or to run their kiosks. Another one asked that Coop asked the bank to open more agent locations (now at 8,765) to serve other parts of the country.
  • Insider Lending at Coop? The CEO assured that all loans taken by directors (total about Kshs 300 million) and employees (about 6.5 billion) are being serviced properly, and that they are known to, and approved by the board. Insider lending had brought down other banks in Kenya, but, he said, this was not an issue at Coop.
  • Legal cases? All banks have legal cases, and they highlighted the main ones in the annual report.

New African Consumer

Today in Nairobi McKinsey & Co, and TBWA released a report on The New African Consumer. It’s one that trends towards rapid urban driven growth with people having with more discretionary spending power,  and one not based on resources. The top states with the highest consumption per capita, and accounting for 75% of all of Africa are SA Egypt, Nigeria, Morocco, Algeria, Sudan, Tunisia Libya Ethiopia and Kenya. Crucially most of the growth (80%) will come from people who earn more than $10,000 per month.
It’s a useful road map for companies looking to understand future trends in Africa and offer lessons such as be online (Africa had more Google ad clicks than Western Europe), brands & quality matter, distribution is king, data is scare, respect country differences & act local, prepare for talent shortage, and expect to iterate (have dynamic execution).
 
The report should lead to a bigger debate, one based on future sustainable economic trends. The same report points out that more babies were born in  Nigeria than all of western Europe. So more studies need to be done in that regards to answer where will the increased African population work? Where will they learn and get medical care? Who will build houses for them? How will they commute? Who will grow food for them as more will reside in large urban centres? Will they be able to cross-borders in such of improvement in any of these challenges? That’s the next set of questions & opportunities to balance out with the insightful trends in this report.