Category Archives: NSE investor awareness

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.

Shareholders Chat with Mbuvi Ngunze

I had a tea chat with Mbuvi Ngunze former CEO of Kenya Airways (KQ), now advisor to the board on his time at the airline and views for the future. It was with a view from the perspective of retail investors and shareholders who will be affected by a restructuring process that is ongoing.

Excerpts

Assets: The airline now has a lean fleet with three aircraft groups: Embraer 190’s, Boeing 787’s and Boeing 737-800’ s (with some 700’s); while this is thin, this choice decision to stretch the fleet was much better than having idle aircraft sitting around – and they have been able to serve similar passenger numbers with the smaller fleet. He added that the global industry is in a slump with airlines like Emirates and Ethiopian parking aircraft but with KQ did not have that option, and it was perfectly okay to lease out aircraft and get them  back in a few years

Liabilities: They were servicing bank loans, but these unsecured lenders (the local banks) had to be refinanced. While some banks were upset about the deal to take equity in the airlines, and some are less comfortable in taking a hit, he emphasized that KQ had to treat all banks as an asset class equally in the transactions, and could not pick only some the banks.

Could this have been done earlier so the restructuring was not as drastic? He said it had to happen like this, in sequence, and that they had to right-size their operations before they turned to the banks and the balance sheet.

Revenue:   Routes have to make commercial sense to take them on. While there is an expectation to have direct flights to the US start soon, he;d rather get the ability to code share, sell tickets, and earn revenue  by selling tickets from Nairobi to any US city first. KQ can’t do that now, but Kenyan passengers do that with their partner KLM.

Also, there are many aspects to ticket pricing and KQ has to maximize on routes where they can to realizxfe profits for shareholders.

Expenses:  Expensive Advisors? one complaint about the restructuring was the amount going to be paid to deal advisors  –  but he said that was traditional for arranging such deals and the costs were about 5% which as typical

Management: I conveyed a question from blogger/investor Coldtusker – on a perennial problem  at KQ of misaligned interests between board/management and shareholders, – his predecessor famously hinted that he’d rather buy livestock than airlines shares, and Mbuvi said that this was one of the things being addressed in the new equity deals that calls for KQ employees to own up to 2% of the airline through an ESOP. He could not say if this is what led to pilots staging a go slow last week, but he said that he was not involved on a day-to-day business since he hadlong ago  handed over and oriented his successor – but added that performance-based compensation had to happen – however unpopular it was for pilots or shareholders.

Other Chats

  • Expectations: He said, it’s wrong to compare KQ and Ethiopian airlines, as they operate in totally different airline market. Ethiopia is a closed aviation market, while Kenya is an open market – and Kenya’s open policy means that they control 40% of traffic into Nairobi, while Ethiopia has 80%. At Addis, Emirates flies’ 7 times there, compared to 21  to Nairobi and they also control cargo.
  • London Heathrow sale: a slot is not a building or a desk that was sold – it is the much-coveted right to a time to land and take off from Heathrow
  • The Senate was a circus – one that delayed and disrupted ongoing shareholder discussions, and where wild claims were made before television cameras – such as allegations of secret ownership of aircraft. He said KQ does not need to use intermediaries to talk to Boeing or Embraer.
  • He has no regrets; he came in as CEO at a time when things went wrong at the airline, but he does not feel he was handed a poisoned chalice.
  • Could things have been done differently? Yes, he would have taken Project Mawingu in slower steps.

For shareholders, he said it could have been worse and he says this restructuring is not due to the new companies act – the law was always there. Nationalization was considered, but it was discarded as it would not be good for KQ to operate as a government parastatal.

At the EGM this week, where shareholders will vote on an equity restructuring program, the same board will be there, and he will attend as a board advisor, not the CEO. The board will change after that and he says that going forward, he plans to be a shareholder of the airline.

Farewell Safaricom Kenya, Hello Africa

Two weeks ago, Vodacom minority shareholders vote in favour of the Safaricom transaction, an acquisition of 35% of Kenya’s leading Telco from Vodafone (UK) – in a deal valued at 35 billion rand (275 billion shillings / $2.7 billion). This they did by approving of purchase of the entire 87.5% of Vodafone Kenya from Vodafone in exchange for 226 million new shares in Vodacom South Africa and not more than 50 million rand in cash (and within two years, Vodafone will sell up to 36.3 million of these shares to comply with SA listed company rules)

The Vodacom group has 66 million customers and 13 million m-pesa ones – and will add on 28 million Safaricom ones (including 19 million m-pesa ones) who use over 100 different products. 

Some excerpts from official Vodacom documents:

  • The transaction would further enhance its position as a leading African mobile communications company and acquiring Safaricom provides Vodacom with a unique opportunity to diversify its financial profile in a single transaction (as at June 2017 about 80% of their 20.7 billion rand group revenue for the quarter was from south Africa)
  • Vodacom Group Chief Executive Shameel Joosub: This is an exciting deal that provides Vodacom shareholders with access to a high growth, high margin and high cash generating business in the attractive Kenyan market. The proposed transaction increases our presence in East Africa and makes Vodacom a formidable player in financial services on the continent.

For Safaricom:

  • The deal was expected to conclude on August 1 and “The proposed share swap is expected to bring to an end a clause that barred Safaricom from venturing outside Kenya ” and “ While Safaricom will still not be free to enter Vodacom markets in Africa, it will now move to new countries where the South African firm does not have a presence. Vodacom will in turn be free to use M-Pesa in its markets” (Vodacom owns stakes of 65% in Tanzania where they have 12 million customers, 51% in Congo with 10 million customers, 85% in Mozambique with 5 million customers (and 2.5 million m-pesa ones), and 80% in Lesotho where they have 1.5 million customers).
  • Vodacom intends to pay 90% of earnings as dividends.
  • For accounting purposes, Vodacom will treat the 39.93% Safaricom stake as an investment in an associate company.
  • Vodafone Kenya currently has a right to appoint, remove and/or replace four of Safaricom’s ten directors – and these rights will move to Vodacom, but Vodafone will have the right to nominate one of the four directors (as long as it retains at least 12.5% of Vodafone Kenya.
    It is expected that Vodafone/Vodacom will still decide who the CEO and Financial Director are (…the appointment of any Managing Director/CEO and the Financial Director/CFO is the responsibility of the Board and is subject to a veto by any Director appointed by Vodafone Kenya)

Kenyan Mergers and Job Retention

This week the deal for Diamond Trust Bank to acquire Habib Bank was approved by regulatory authorities. The Central Bank of Kenya approval notes that Habib will acquire 4.18% of Diamond Trust (the 6th largest bank in the country) and that the transaction would be completed on August 1, 2017, when Habib Bank (the 33rd largest) will cease being a licensed bank, and all its depositors, borrowers, employees, and creditors will be transferred to Diamond Trust.

As is the norm these days for large M&A deals to be approved in Kenya and the COMESA trade zone of Africa, there is a focus on job retention for as many of employees, and that there be no layoffs, while some business will continue with existing partners in terms of sales, distribution, servicing, and licenses for a defined period of time after the deal.

  • The Competition Authority (CAK) has approved the Diamond Trust Habib deal “on condition that the acquirer, Diamond Trust Bank Kenya retains at least 41 employees of Habib Bank post transaction.” This is also seen in other recent deals approved by the Competition Authority:
  • Distell Holdings which became the majority owner of Kenya Wine Agencies Holdings East Africa earlier this year was required to “retain the 42 employees at the production unit of KWAL for at least three years,”
  • For the Coca Cola Beverages Africa purchase of Equator Bottlers (at Kisumu through Kretose Investment) “the merged entity retains at least 2,279 employees post transaction”
  • And approval of the acquisition of 57.7% of General Motors East Africa by Isuzu Motors has a “condition that the merged entity will absorb all of the 383 General Motors East Africa employees.”
  • Also, earlier, CAK, ordered listed banker I&M Holdings to retain 108 employees of Giro Commercial Bank, as a pre-condition for approval of the takeover.

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