Category Archives: NSE investor awareness

KCB to acquire National Bank of Kenya

KCB has made an all-share offer to acquire National Bank of Kenya in a not too unexpected move. Kenya’s largest bank will acquire the private, but state-controlled, NBK that was wrestling with an undercapitalized position.

KCB will acquire NBK, which has assets of Kshs 115 billion by offering 1 share for every 10 NBK shares. KCB trades at about 45 and NBK at 4.5 and this puts the offer, after conversion of NBK preference shares into ordinary ones, at about Kshs 7 billion. NBK has deposits of Kshs 99 billion and loans of Kshs 47 billion. It issued a rather late profit warning just before reporting a pretax profit of Kshs of 587 million for 2018, in March this year.

Bank shareholders: The NBK results notice also mentioned that its principal shareholders had committed to increase the capital of the bank a year ago. The Government of Kenya and the National Social Security Fund (NSSF) are significant shareholders in both KCB and NBK. At KCB the Government owns 17.5% and NSSF 6.12% while at NBK, the workers’ fund has 48% and the Government has 22.5%.

This deal presents an opportunity to rescue National Bank whose capital to asset ratio had dipped to 3%, far below the statutory minimum. The Government has grappled with how to restructure its portfolio of struggling banks and this option is a cash-less one that will see it and NSSF increase their shareholdings in KCB as other NBK shareholders gain by obtaining shares in the Kshs 714 billion KCB, the regional banking leader. Trading of shares of both banks was briefly halted on Friday morning, prior to the announcement.

Conditions of the deal to go ahead include approval by 75% of NBK shareholders (NSSF and the government own a combined 70% of the shares), while the Government is to also convert 1.135 billion preference shares in NBK into ordinary shares, representing a recapitalization of the bank by Kshs 5.7 billion. Also, if the deal is concluded, NBK will be delisted from the Nairobi Securities Exchange.

Banking M&A: KCB is now in the process of acquiring two banks – NBK and Imperial as two weeks ago the CBK and KDIC announced an improved offer deal with KCB for Imperial’s assets. The deal news comes in a week after NIC and CBA shareholders approved a merger of their banks.

It remains to be seen if Equity and Stanbic, which have expressed takeover designs on NBK over the last decade, will put in a bid for NBK. And also what will happen to other banks in similar positions of being in dire need to raise capital from their shareholders to meet statutory requirements.

NIC Bank shareholders approve merger with CBA at the 2019 AGM

NIC Bank shareholders met for their 2019 annual general meeting and approved a merger with CBA bank, creating Kenya’s second-largest bank (by customer deposits), a day after CBA shareholders had approved the same deal.

The merged bank will have about a 10% share of banking assets, deposits, and loans in Kenya. It will encompass the two groups serving over 41 million customers and their banking entities in Kenya, insurance (CBA Insurance and NIC Insurance), investment banking & stockbroking (CBA Capital, NIC Capital, NIC Securities), and regional subsidiaries in Tanzania (both banks), Uganda, (both banks) and Rwanda (CBA) and Côte d’Ivoire where MoMoKash is a CBA partnership with MTN and Bridge Group.

Group Managing Director John Gachora said scale is important in banking and that by merging NIC, which is known for asset finance and corporate banking, with CBA, which has desirable mobile banking and high net worth businesses, they would be the largest bank by customer numbers in Africa. CBA will be 53% shareholders in the merged bank.

NIC turns 60 this year, and in 2019, their focus will be on getting to Tier I ranking through the merger, and getting regulatory approvals after they had obtained shareholder approvals.  Directors also got approval to effect a name change (already under consideration) and the right to dispose of up to 10% of the assets of the bank without reverting back to shareholders. They will also create an employee share option program (ESOP) to retain key staff, and CBA, who already have an ESOP for their veteran staff (that owns 2.5% of that bank), will fold itself into the new incentive scheme. Other conditions of the merger include obtaining a waiver of capital gains and stamp duty tax in Kenya, approval of regulators in different countries, and approval of landlords and financial partners.

African Companies Foreign Listings

The listing of Jumia on the NYSE has elicited many discussions about how ‘African’ it is to qualify for the moniker of “first African tech IPO”.

London has been the listing home of many large African companies in the oil, gold, mining space for many years. It has also recently come to attract more banks, Eurobonds and Diaspora bonds. There are 119 African companies listed in London including top Nigerian banks while sovereign bonds of 11 African countries trade on the LSE.

Other recent listings have gone to foreign markets including:

  • Vivo Energy’s LSE listing in 2018, which was the largest IPO of the year in London.
  • In Nigeria, which is Jumia’s largest market, here’s an investor recap of all the listed ‘tech stocks’ on the Nigerian Stock Exchange which include Courteville, Triple Gee, NCR, eTranzact, CWG, Chams, and OMATEK.
  • After spinning off Multichoice, Naspers plans to list its international internet assets on the Euronext Amsterdam Exchange with a secondary listing in Johannesburg. The assets include companies like PayU, Souq, Flipkart (which was sold to Walmart in 2018), Tencent, and Mail.ru. It only makes 4% of its revenue in South Africa and accounts for 23% of the Johannesburg All-Share SWIX exchange. By listing 75% of the company in Amsterdam, this will reduce its weight in the South African exchange. Safaricom is in a similar situation in Kenya, accounting for about 40% of the value of the Nairobi Securities Exchange, but as its revenue is currently all from Kenya, a listing move away is unlikely.
  • Within Africa, the island nation of Mauritius is an attractive listing country and is considered a gateway to India and Africa for many venture funds. Listing there confers benefits including no capital gains or dividend taxes, and Mauritius can also grant residency to people who invest over $500,000.

Other foreign listings planned include:

  • Airtel’s listing of its’ business in 14 African countries is expected to be another large London blockbuster.
  • Kenya’s National Oil is a long-shot to be listed in London and Nairobi.
  • Dangote Cement which accounts for about a third of the Nigerian Stock Exchanges market capitalization plans a secondary listing in London later in 2019.
  • MTN is expected to list a share of its Nigeria subsidiary once a tax dispute matter is resolved.

AVCA 2019 private equity and venture capital conference in Nairobi

The 16th annual conference of African Private Equity and Venture Capital Association (AVCA) was held from 1st -3rd April 2019 at the Radisson Blu Hotel in Nairobi. A guest post by Marcela Sinda.

This flagship conference event for the African continent had a fantastic kick-off and turnout, bringing together private equity and venture capital investors who handle a portfolio of over $1.5 trillion in assets. This was according to Kenya’s Cabinet Secretary for Trade, Peter Munya who officially opened the conference on behalf of President Uhuru Kenyatta. The goal of this kind of conference, he said, is to expose investors to the diverse prospective investment markets across the Africa as the continent was now being looked at as any other region, with the focus being around checking due diligence, ethics, looking at best practices and asking the same questions around deal sourcing.

 

DFI’s Role: Kenya is an increasingly attractive investment destination and according to AVCA data, it is the 2nd most attractive country for private equity investments in Africa over the next three years and hence an obvious choice to gather the industry players for this conference. The African PE sector has been shaped for decades by DFIs, and at AVCA 2019, there was some discussion about new DFI strategies for investment across Africa. Maria Hakansson, the CEO of Swedfund, noted that, as a community, DFIs could do so much more when it comes to anti-corruption, e-waste management, customer protection principles etc. and that Africa’s portfolio is constantly outperforming in terms of impact compared to other regions portfolio.

Djalal Khimdjee, Deputy CEO of Proparco said SMEs in Africa are essential towards job creation and achieving the sustainable development goals (SDG’s) and that 60% of the 1.5 million jobs that have been created in Africa every month come from SMEs and venture capital firms. He said that PROPARCO and French development agencies had committed £2.5 billion by 2022 to support African MSMEs, including £1 billion through private equity investments. 

Mathew Hunt, Principal at South Suez Capital shared that one of the reasons why investors are in Africa and especially now is because of the tech-driven growth that’s been on the rise in recent years. Venture capital investments are new in Africa and only a handful of funds have grown successfully.  The role of African Development Bank, said Robert Zegers, their Chief Investment Officer, was to now help support the industry and act as anchor investors in these funds as a lot of development agendas can be achieved by generating value through VC’s and great businesses.

The narrative throughout the discussion panels was around the real opportunities Africa presents for investment with building blocks in place such as improved policies, the rise in middle-income earners, the Africa Continental Free Trade Area, and enablers such energy, improved infrastructure and technology as pathways that cater for development needs. The most attractive areas for P/E investment were perceived to be consumer-driven sectors (financials, FMCG, agribusiness, healthcare and technology).

Deals Galore: VCs are willing and able to take risks and are looking to invest much more than they did previously. According to the  AVCA report 2018, VCs invested $725.6 Million in 458 deals a 300% leap in the total funding amount and over 127% increase in the number of deals as compared to 2017.  VC fund managers, therefore, need to have great entrepreneurial skills to identify numerous opportunities and create great pipelines for growth and expansion. This is the first generation of PE owners and from the lessons learnt, a good company always attracts a buyer and a great way for VCs to approach funding private companies is to ask; ‘if everything works out, how big can this be?’. But investors ought to be cautious not to misconstrue Africa as a single country with regard to investments, rather, and instead start by breaking down the micro trends in each jurisdiction and analyse the different risks.

Investments, not Aid: Charles Mwebeiha of Sango Capital urged investors to look at Africa while investing, like any other region in the world noting that many times, investing in Africa is made to sound like some sort of assistance. He offered that the issue should be whether returns can be made and reiterated that with good strategies, there is money to be made in Africa.

Women: It was also highlighted that having a gender-sensitive lens when investing is an imperative for an inclusive and fair investment strategy and that, especially in Africa, the number of female entrepreneurs supported is a key metric. There is an even split between male and female entrepreneurs on the continent but less than 2% of those women are getting formal funding as they are often working in hidden, informal sectors.

Exits: A major area of discussion was around exits. Carlos Reyes of the IFC,  pointed out that; “to prepare companies for exits, we try to improve reporting standards, corporate governance and we look at the bench – so if the entrepreneur leaves, who can come in? The succession process is quite important.” Exits are not the easiest but they are not deal-breakers and good exits can be achieved. At Leapfrog Investments, they evaluate exits right at the beginning, by sitting down with the owners to try to understand their dreams for the future so as to align funding with their plans for exiting.

Predictions: And finally, taking a forward look at the sector five years into the future, George Odo, Managing Director of AfricInvest Capital Partners observed that there would be more capital raised from African economies, more policy changes required to mobilise pension funds, much more experienced fund managers, and also more EA players paying attention to Ethiopia.

Glossary
AVCA – Africa Venture Capital Association
EA – East Africa
PE – Private Equity
LP – Limited Partners
DFI – Development Finance Institution
IFC – International Finance Corporation
PROPARCO – A Development Financial Institution partly owned by the French Development Agency
SME – Small Medium Enterprise
MSME – Micro Small & Medium Enterprises
VC – Venture Capital

Genghis Stock Picks for 2019

Nairobi-based investment bank Genghis Capital launched their 2019 “investor playbook” with the theme of embracing value. 2018 was a challenging year for the Kenyan economy and capital markets and that is expected to continue in 2019, but this also presents opportunities for investors.

Kenya has a relatively small number of stocks (65) on the Nairobi Stock Exchange (NSE) – and Genghis chose nine stocks as their 2019 financial (banking & insurance) and non-financial picks for investors, in three categories:

  • Momentum stocks: Equity Bank, East African Breweries, KCB Group, Safaricom.
  • Income stocks: Stanbic, Barclays Kenya, Standard Chartered, KCB. 
  • Value stocks: Kenya Reinsurance, KCB, Bamburi Cement. 

They cited that Safaricom scored positively in every category while KCB and Equity banks had embraced digitization, high asset quality and low cost structures.

Other points from the playbook launch presentation:

  • They do not expect a repeal of interest rate caps this year, even though its impact has been negative on the economy.
  • Funds raised for infrastructure bonds are not all being used for that; some are going to retire other debts and they should be properly used
  • Public-private partnerships are not coming to fruition; paperwork for the Nairobi-Nakuru highway was submitted in April 2018 but there has been no decision.
  • To a question – “what is the regulator doing to increase the confidence of investors amid fraud incidents?” – the CMA can only do so much and the onus is still on the company directors. International markets have graver penalties than Kenya and perhaps it is time the Director of Public Prosecutions started looking at some cases here and following through on enforcement. 
  • While Kenya Re is a pick in the playbook, they generally don’t cover the insurance sector – it has challenges including fraud, price under-cutting, and low penetration levels (3%) and a lot has to happen to unlock value and growth in the insurance mass market. Kenya Re is there because it is under-valued (owing to lack of clear strategy and proper management) but would be desirable to other insurance investors if the government decided to sell its shareholding.
  • They expect one main listing and others on the smaller NSE boards this year. But while a number of planned privatizations have been mentioned  – Consolidated and Development banks, Kenya Pipeline, Kenya Ports they face numerous hurdles while others like sugar companies in Western Kenya have been on the pipeline since 2011.