Category Archives: oil industry

KQ & Fuel Hedging

Last week, Kenya Airways (KQ), announced a pre-tax loss of Kshs 29.7 billion (about $297 million) for the year 2015. This was a shocker as it was the largest announced loss in corporate Kenya’s history and the airline’s management have given various reasons for the loss.

The summarized results released show that the airline had unrealized losses on fuel derivatives of Kshs 5.7 billion ($57 million) for the year and realized losses of Kshs 1.6 billion ($16 million)   After their last big loss of 2009 many thought, they would shy away from fuel hedging, but that practice is quite common and is very useful for airlines.

  • A 2014 Bloomberg piece notes that Air France-KLM hedged 63% of its estimated $2.4 billion fuel bill for the third quarter, compared with 74% of its $2.5 billion consumption a year earlier. Also that, Ryanair Holdings Plc, Europe’s biggest discount carrier, kept its coverage unchanged for this financial year at 90%.
  • Kenya Airways fuel bill was about $400m in 2014. The KQ 2012 rights issue Information Memorandum noted that, in December 2009, the KQ Board approved a fuel hedging policy of hedging for up to 80% of the Group’s fuel requirements for the upcoming 12 months and for up to 50% of its fuel requirements for the upcoming 24 months, on a rolling basis.
  • Fuel hedging in Africa:   Two of KQ’s main rivals are Ethiopian Airlines (ET) and South Africa Airways (SAA). ET recognizes that jet fuel is a major expenditure of the airline (about $791 million in 2012) and they manage this risk using various hedging strategies for a maximum period of two years on a rolling basis; and the maximum to be hedged is 75%. At SAA, where fuel is also their biggest cost (35% or $754 million in 2012), their policy is to hedge a maximum of 60% of the fuel exposure on a 12-month rolling basis.
  • The hedges have actually worked well in Kenya Airways favour except for the spike years of 2009 and 2015. There was no loss in 2012 and 2013, a slight gain in 2014 and now a larger loss in 2015.
  • So fuel hedges are not a factor in KQ’s record loss.

Capital Gains Tax in Kenya

It’s a new year, and with it comes the reintroduction of the capital gains tax (CGT) in Kenya. This is not the first time it’s appeared (it was suspended in 1985), but previous attempts to reintroduce it in 2007 and 2011 were set aside by parliament. This time it has stuck and is now the law, with the a 5% tax imposed on the transfer of land, buildings and investment shares.

While guidelines have been published by the Kenya Revenue Authority (KRA) it’s still unclear how the tax is to be determined such as on the buying and selling of shares.

For the last few weeks there’s been a mini-rush to complete the sale of some land and share deals. e.g. Equity Bank’s divestiture from Housing Finance with a sale of 24.9% to British American Investments (Britam) for Kshs 2.7 billion ($30.3 million) was concluded on December 31, 2014 (presumably beating the tax deadline).

With land deals, there may be some double taxation, in that  that while a buyer pays stamp duty of 4% of the sale value, the government will also deduct 5% from the amount paid to the seller for the same piece of land.

CGT will apply when  a property is gifted, abandoned or when the rights to a land title. Exemptions allowed under CGT include transfers that involve retirement benefits, divorce, land that is less than 100 acres, when a company issues shares, motor vehicles, estates of dead people, in corporate restructurings, and if someone sells a house they have lived in for more than 3 years.

Curiously the guidelines have something special for Kenya’s budding extractive industry, but which some investors are not happy about as for sector, which includes, oil, gas, and minerals comes up for some special attention: The net gain on disposal of interest in a person owning immovable property in the mining and petroleum industry is taxable..at 30% for residents and 37.5% for non residents. 

BritAm and Swala Investments

Last week saw the announcement of two new regional investment opportunities – one a new bond offer in Kenya and the other – an IPO in Tanzania – that both close on July 4.

BritAm Bond: Kenyan financial group Britam announced a Kshs 6 billion ($69 million) bond  which will be in two tranches starting with an initial target of Kshs 3 billion.

 Some excerpts from the bond prospectus 

  • There is a green shoe option of Kshs 1 billion in the first tranche.
  • Funds raised will be utilized in private equity, ICT development and local and regional expansion projects.
  • The minimum investment is Kshs 100,000 (~$1,150) with multiples after of Kshs 50,000.
  • The 5-year bond (maturing in July 2019) pays 13% a year (6.5% every six months). So if you invest Kshs 100,000, you will get an interest payment of ($) Kshs. 6,500 twice a year.
  • The bonds will be listed at the NSE for easy trading.
  • At the end of 2013, BritAm had Kshs 47 billion of assets, revenue of Kshs 15 billion and a pre-tax profit of Kshs 3.1b. They had Kshs 3.7 billion in investment property and Kshs 6.1 billion in listed companies. They own 21% of Housing Finance, 10% of Equity Bank and 25% of the Acorn group. They are acquiring Real Insurance for Kshs 1.3 billion (825m cash and shares  for the balance).
  • The bond issuance will cost Kshs 57m shillings – and Dyer & Blair get about Kshs 36M of this as the arranger gets (27M) and for the Placement (9M).

Swala Energy: Swala Oil & Gas (Tanzania) aim to raise between TZS 1.6 billion ($969,000) if they sell 3.2 billion shares and TZS4.8b ($4.8 million) if they sell 9.6 billion shares at TZS 500 each. The Offer is conditional on the Company achieving a minimum subscription of 3,200,000 Shares under this Prospectus, to raise TZS 1,600,000,000 (before expenses of the Offer). The Company may decide not to allot any shares and repay all application monies or seek a no objection to proceed with the allotment, in case the minimum subscription is not attained.

  • The minimum subscription is TZS 50,000 ($30) for 100 Shares. You can apply online, but a physical application form must be received at the brokers by 4th July.
  • Swala has total assets of $1.8 million in 2013 (up from $75,000 in 2012). Revenue in 2013 was $285,000 (up from $62k)  and loss was $5.5 million for the year (down from $1.26m the year before).
  • They are fundraising as they plan to spend $3.5M next year and $6M the year after.
  • A London broker values the company at $52.3 million based on 50% interest in Pangani (an area of 8578 sq. km worth $25.1m) and 50% in Kilosa Kilombero (an area of 8838 sq. km worth $36.3m). Otto Energy is a 50% partner in both of these ventures. 
  • The Costs of filing will be between TZS 210M and TZS 248M ($150,000) with printing costing 32M, accountants 40m (~25,000 to BDO), technical specialist (Risc Pty) 40M legal (Asyla) 16m, nominated advisors 27M (~$16,000 to Arch Financial if $3m is raised) and the Dar es Salaam Exchange gets 27M.
  • The Swala Energy prospectus gives insights on Kenya oil deals that are rarely public and which are used as a basis for the valuation of these shares and for comparison as they are all in the East Africa Rift System E.g. Recent Kenya transactions (EARS ) include Marathon Oil bought aBlock 12A license from Africa Oil for $78.5M and a Block 9 license, Africa Oil bought a  Block 12A license from Tullow for $3.86M ($1,265 per sq. KM and Adamantine sold a Block 11B license to Bowleven for $10M ($1,429 per sq. KM).
  • In Tanzania, profits from oil are shared out as 45% government and 55% to the contractor when production is less than 12,500 barrels per day and when barrels are over 100,000 per day, the government gets 70% and the contractor 30%.
  • Swala has applied for approval to list on the Enterprise Growth Market section of the Dar es Salaam stock exchange (they need 100 shareholders so list).
  • Swala will go from holding 74% to 61%  and new shareholders all have 10% with convertible noteholders at 7%.
  • Tanzanian Applicants will be allocated Offer Shares in priority to all other Applicants. Any Offer Shares remaining thereafter will be allocated to East African Applicants. Offer Shares will only be allocated to Foreign Applicants if they have not all been acquired by Tanzanian Applicants and East African Applicants.

Tullow Oil & Mining Payback in Kenya

Tullow Oil have just released their Kenya Report on their oil exploration efforts and local impact in the last year with special emphasis on the Turkana area.

And earlier, Base Resources who are a signatory to the Extractive Industries Transparency Initiative had also released their EITI impact report.In the last year, by their measure, Tullow Oil and Base Resources have paid the Kenya government $22 million and $16 million respectively in direct payments, and with more indirect benefits.  

Oil and mining are industries that are complex and expensive to set up, but which don’t generate a lot of direct jobs – some of their numbers include:

  • Last year, Tullow paid Kshs 4.1 billion (~$48 million) to Kenyan suppliers, $100 million to foreign suppliers registered in Kenya and another $100 million to international companies. Of the Kenya supplier amounts, Kshs 259 million went to Turkana business interests.
  • They still need Kenya petrol legislation. 
  • Estimated findings are 600 million barrels in South Lokichar alone.
  • Infrastructure Needs: Looking at an export pipeline and regional road and rail. Regional countries need to support an export pipeline, agree on what route will such a pipeline take, where the terminal will be (likely to be Lamu) – and who will invest/pay for this. The proposed underground pipeline will need to be a heated one, and at 850 kilometres will be the longest heated pipeline in the world.
  • Social Impact: Tullow have community resource offices in Lodwar, Lokori, and Lokichar – and this year, plan to double the Kshs 233 million ($2.75M) they spent on social projects in 2013, during which they faced community concerns and protests of local impact which even temporarily shut operations. They have provided 3,000 bursaries and scholarships and teaching materials for 50 schools.
  • Jobs Jobs Jobs: Tullow has 100 employees on-site, 70% of who are Kenyan. Another 2,000 are employed by their subcontractors/suppliers and 87% of these are staffed by are locals, and 59% by Turkana people.

Kenyan M&A

Compared to one year ago

On-Going Deals

Auto’s: – This week Al-Futtaim held a press conference to reaffirm their commitment to African market that is being spearheaded by their takeover of CMC  in Kenya.  More than anything the event was meant to showcase that the group founded in 1930,  but which few in Kenya had heard of before the deal, is a serious legitimate company (unlike shadowy China Road & Bridge that has a $3.8  billion contract to construct a standard gauge railway in Kenya.)

They have several car franchises 65 years of Toyota in UAE, Volvo, Honda vehicle assembly parts & service, used car business  and is also in engineering, financials services and the retail mall development business in the Middle East  and Asia

Al Futtaim  are long-term investors will retain the CMC brand as it has a 65 year good history that will overcome the last two bad years . But they will de-list the company as they believe that being a private company will give them the flexibility to move faster and reclaim customers and brands that have been lost such as Land Rover. 

Interestingly, the opportinuity to buy CMC was presented to them by one of their banks who knew of their interest in Africa. The company then had to work very hard to meet and bring the feuding key shareholders on board to back the buyout.

EDIT Kenya’s competition authority has now approved the acquisition of 100% of CMC Holdings by Al Futtaim Auto

Scania East Africa Limited  have taken over the purchasing, importing, assembling, fitting out, selling, servicing  of trucks, buses and chassis in Kenya that was previously carried out by Kenya Grange Vehicle Industries.

Actis buys 36% of AutoXpress, East Africa’s leading tyre distributor, with 20 stores in Kenya and Rwanda.

Merali and Sameer complete buyout of 14.9% of Firestone’s stake in Sameer Africa.


Banking

CBA returns to Uganda after 47 years.

Fina Bank has changed over its operations in Kenya, Uganda and Rwanda to GTBank East Africa after Guaranty Trust Bank concluded the acquisition of a 70% stake in Fina Bank Group for $100 million through combination of a capital injection and acquisition of shares from Fina Bank shareholders.  

Pakistan’s MCB Bank to acquire Kenya’s Middle East Bank (via the Standard).

Kenya’s  competition authority  has approved the acquisition of 73.35% of Genesis Kenya by Centum Investments.

Letshego Holdings  of Botswana has acquired Micro Uganda, a year after acquiring Micro Africa Ltd of Rwanda.

Food &  Beverage

Art Caffe acquired Dormans increasing their outlets from 4 to to 11 and giving them a presence in more shopping malls like Yaya, Karen and City Mall in Mombasa where Dormans had shops. However the Art Caffe were rankled by a quite in a local newspaper referring to their customers as being upmarket compared to Dorman’s ones. 

EDIT: Kenya’s  competition authority  has now approved the acquisition of 7 coffee shops of Dormans by Art-Caffè.

Pearl Capital partners have invested $1.5 million in KK Fresh Produce. 

Kenya’s  competition authority  has approved  the acquisition of Rafiki Millers  by Tiger Brands.

Kenya’s  competition authority  has approved the acquisition of Magic Oven Limited by Tiger Brands.

Beauty: 

A Netherlands-based private equity fund, TBL Mirror Fund, has bought a minority stake in a high-end Nairobi salon chain that is seeking capital to expand across East Africa.

Advertising: 

Kenya’s  competition authority  has approved the acquisition of additional 16.48% shareholding in Scangroup Limited by Cavendish Square Holdings BV. 

Health: 

Kenya’s  competition authority has excluded the acquisition of 100% of Adcock Ingram Holdings Limited by CFR Inversiones SPA from the Act

Hotels: 

South Africa’s City Lodge acquires Kenya’s Fairview Hotel  after Fairview Hotel firm agreed to sell the outstanding 50% of the joint venture 

Insurance: 

Kenya’s  competition authority has approved the  acquisition of 66.38% of Phoenix of East Africa Assurance Company Limited by Mauritius Union Assurance

British American (BritAM) completes buyout of 99% of Real Insurance.

Oil

Kenya’s  competition authority  has excluded the acquisition of a 55% participating interest in Block 11A from ERHC Energy by CEPSA Kenya

Kenya’s  competition authority  has excluded the acquisition of a 55% interest in Block 2B in Kenya from Lion Petroleum by Premier Oil 

Transport 

Precision Air  of Tanzania seeks a bailout from Kenya Airways? 

Transcentury to reduce stake in Rift Valley Railways (RVR)?


Other
India  Exits

Ambani reports a Kshs 2 billion profit from Kenya real estate.. Ambani’s Reliance Industries in 2007 entered into a joint venture with Delta Corporation, which has developed high-end office blocks and a mid-to-low cost residential estate in Nairobi. Delta Corporation now says it plans to exit its real estate investments to venture into hospitality and gaming businesses. 

Essar to finalise sale of its Kshs 8.5 billion Yu stake in March ..the firm says it needs the Sh8.54 billion immediately and more cash in the short term to widen its footprint in Kenya and upgrade its network from 2G to 3G.

Essar also faces a Kshs 430 million hit in its Kenya oil refinery exit ..the government and Essar Energy Overseas are engaged in compensation talks following the Indian firm’s decision to exit the refinery.

New Deals

Agriculture: At Rea Vipingo, Bid Investments withdrew their offer and have signed up with Vania Investments who are offering a new Kshs 55 per share  bid – worth Kshs 3.3 billion ($39 million) –  for the company that will leave it listed at the NSE

 E-Biz: 

There’s a potential change in ownership, at MyStrawberryStore 

Kenya’s  competition authority  has excluded the  acquisition of 999 Ordinary shares 

of My Kenyan Network Limited by African Jobs as the two have a combined turnover of Kshs 12.6 million

Regulator Issues

Pepsi came to Kenya and took on Coke but have not made much impact. They are now saying that has Coke been unfair ..PepsiCo says that rival bottle has been curtailing its marketing campaigns geared at gaining a larger share of Kenya’s soda market in the complaint to the Competition Authority of Kenya (CAK).
 
Synovate directors risk jail, hefty fines..Competition watchdog asks Tobiko to prosecute Ipsos-Synovate’s chiefs for failure to seek regulatory approval of the firm’s acquisition of its predecessor Synovate.
 
In South Africa The Competition Commission plans to address anti-competitiveness between retailers despite concluding its exclusive lease agreements probe.
The investigation established that the respondents (3 supermarket chains)  were dominant in certain local markets and that they would often compel landlords not to deal with competitors (by entering into exclusive lease agreements with landlords in return for agreeing to ‘anchor’ the centre).

Jobs: Rwanda’s Agaciro Development Fund is seeking an investment office. Deadline is Feb 14.