By JEVANS NYABIAGE and EMMANUEL WERE
NAIROBI, KENYA: Across cities, towns and villages in Kenya, a change in investment dynamics began to take root in the early 2000s and people moved towards modern financial tools.
Before then, most Kenyans came together to pool their resources, mostly money or free labour, in the spirit of harambee.
But a wind of change began blowing across the country as we settled into the new millennium, and it disrupted how Kenyans approach investing in groups.
This wind of change was aptly named TransCentury — formed at a time when the world was moving from the 20th Century (1900s) to the 21st Century (2000s).
CONTROLLING STAKE
TransCentury was formed in 1997 by a group of 29 wealthy businessmen. It started off as a simple chama.
They had verve. Each of the 29 was to bring to the table Sh1 million, which was not a small amount by any measure. Adjusting for inflation, this seed capital works out to about Sh1.44 million today, or more.
They had ambition. They wanted their investments to extend beyond Kenyan borders and cover Africa. They started with an investment in the brewery — SABMiller, taking EABL head on in a market the latter had for long enjoyed a virtual monopoly in.
They then took a controlling stake in the Nairobi Securities Exchange-listed East African Cables in February 2004, from the Naushad Merali-controlled Sameer Group.
When the stock market enjoyed a boom in 2004, TransCentury’s investment in East African Cables gave them outsized returns.
The company then listed in 2011 at the NSE through introduction, which did not require raising money from shareholders or the public.
This in turn spurred a whole new generation of investment groups that idolised the folks in TransCentury. And the chama culture took off.
The chama concept has since taken the investment sector by storm. It has revolutionised finance and increased access for individuals previously overlooked in fund markets.
And with that growth, an umbrella body, the Kenya Association of Investment Groups, was formed.
Banks began lining up to entice chamas with special accounts and discounted interest rates on loans. Statistics were thrown around to support the movement; one in every three adult Kenyans is in an investment group, officials said.
But since the beginning of this year, the mother of all Kenyan chamas has hit a rough patch.
How TransCentury will wriggle itself out of the hole it is in will provide a classic and timely lesson on investing in Africa for the thousands of Kenyan investment groups out there.
TransCentury’s woes started in January 2014 with an ambiguous-sounding statement that the NSE investment company “had exercised an option that would result in a change of shareholding in KU Railways Holdings Limited (KURH), the lead investor in Rift Valley Railways”.
This fuelled speculation as to whether TransCentury would exit RVR.
TRANSPORT PORTFOLIO
Details were scanty then, but there were many questions about the deal. The one question that was at the heart of everything else was: why was TransCentury selling its stake in RVR, yet the railway line is a key artery in East Africa?
In fact, TransCentury’s investment in RVR was its only one under the transport portfolio. By selling off its stake, was it shutting down its transport division, or was it a well-calculated exit?
The company has two other divisions in its investment portfolio: power (such as the investment in East African Cables among other cable firms); and specialised engineering (its investment in Avery, which retails weighing scales and also handles construction of power substations, and Civicon, which is involved in transporting heavy industrial loads).
And then there was the other important question: how much would TransCentury make from the sale of its RVR stake?
Last week, information about the company’s exit from RVR started filtering out. Putting together this information painted a not-so-rosy-picture for TransCentury in its dealings with RVR.
Citadel Capital, a leading investment firm in Africa and the Middle East, bought out TransCentury’s stake. This increased Citadel’s stake to 85 per cent from 51 per cent.
But neither Citadel nor TransCentury gave the exact value of the deal. Instead Citadel said it had raised $80 million (Sh6.88 billion) to inject additional capital into RVR.
“Part of the proceeds of the $80 million capital increase was used to finance the acquisition of shares from TransCentury, while a substantial portion will be injected into RVR for ongoing improvements,” read a statement from Citadel, which is listed at the Egyptian Stock Market.
“The transaction brings Africa Railways’ [the company Citadel is using to invest in RVR] total holding in RVR to 85 per cent via acquisition of shares from TransCentury; capital increase to support the transaction will also see an additional $42.2 million(Sh3.63 billion) in capital injected into Rift Valley Railways,”
Logically, if Sh3.63 billion of the Sh6.88 billion Citadel injected into RVR went into capital, then the remaining Sh3.3 billion was used to buy out TransCentury’s 34 per cent stake.
Standard Investment Bank analysts first raised the figure of about Sh3.3 billion as the price TransCentury got for selling its stake in RVR.
TransCentury valued its 34 per cent stake at Sh3.8 billion in 2012, according to its annual report released Friday last week.
WHAT WENT WRONG
This means that TransCentury has made a loss of at least Sh500 million from its exit. This loss, if true, is likely to feature prominently in the 2014 financial results once they are released.
An analogy would perhaps make it easier to understand what might have gone wrong.
Suppose you buy a quarter of an acre in Kajiado for Sh200,000. In the next year, you build a well — which is an investment — worth Sh80,000.
You will now value your plot at a minimum Sh280,000 at the end of the second year.
In the third year, because of the developments in the area and because of rising demand for plots, your plot ends up being valued at Sh400,000. On paper you will have made an income of Sh120,000 between the third and second year.
But suppose at the beginning of the fourth year your plot is valued at Sh400,000 but you end up selling it at Sh300,000; you would have made a paper loss of Sh100,000.
Companies are required to express this paper loss in their profit and loss statement.
If you replace the person with TransCentury and the plot with RVR, this is what could have gone wrong.
TransCentury is yet to publish its financial results for 2013, so the value of its stake in RVR last year is unknown.
The investment firm bought a 20 per cent stake in RVR and then increased this to 34 per cent in 2010, so the value of investment in the rail operator has been increasing.
According to TransCentury’s annual report, the value of its holding in RVR was Sh643 million in 2009; Sh1.2 billion in 2010; Sh2.8 billion in 2011 and Sh3.8 billion in 2012.
The increase between 2009 and 2010 can be explained because TransCentury put in an additional investment of Sh580 million, according to the company’s annual information memorandum.
However, its annual report for 2012 does not explain how the value of its investment in RVR jumped from Sh2.8 billion in 2011 to Sh3.8 billion in 2012.
Furthermore, the difference in value between one year and the next is supposed to be passed through the profit and loss accounts.
And so the Sh1 billion (the difference between the Sh3.8 billion in 2012 and Sh2.8 billion in 2011) is passed through as income in the 2012 financial accounts.
If it turns out that TransCentury has made a loss of Sh500 million from the sale of its stake in RVR, analysts are raising concerns that the investment firm could be overvaluing its assets.
“It is certainly a problem ...what is the real value of the other unlisted items? Could they have the same sort of overstatements?” asked an analyst who spoke on condition of anonymity.
However, TransCentury’s head of communication, Ms Phyllis Gachau, said the reported figure of Sh3.3 billion was incorrect.
She told Business Beat that the company would be releasing its financial results for 2013 with the correct figures by the end of this week.
But the earlier question remains: why is TransCentury exiting RVR?
CONNECTED AFRICA
The Egyptians seem to have a clear idea of what and where they want RVR to be a few years down the line.
By connecting the East African region — and the ambition is to get RVR to South Sudan — by rail, they will inch closer to an interconnected Africa.
Further, Citadel has some investments in Sudan and South Sudan, so the rail offers a good opportunity to move its cargo cheaply.
The firm has also invested in a company called Nile Logistics, which offers logistics solutions including on the River Nile.
And with the increased interest in oil and gas as well as other minerals in the region, creating a transport corridor using railway lines and the Nile will give Citadel the opportunity to transport these commodities to international markets.
“Together with our leading development finance institution investors, we believe the citizens and business communities of Kenya and Uganda have a right to a world-class railway that serves as an engine of national development and regional integration.
“We are honoured to continue working with our partners in Africa Railways to structure, advise and fully fund RVR’s turnaround story,” said Mr Ahmed Heikal, the chairman and founder of Citadel Capital.
“RVR is one of the most exciting investments in our portfolio, and our most significant investment in East Africa.”
FINANCIAL MUSCLE
Citadel has the financial muscle to continue investing in RVR to achieve the turnaround. They are the largest private equity firm in Africa, controlling more than $9.5 billion (Sh817 billion).
Perhaps TransCentury was looking at the RVR glass as half empty.
First, they could not match Citadel’s financial muscle and continue pumping in more dollars into RVR to achieve the vision of a connected Africa by rail.
Second is the politics. Most of the 29 original founders of TransCentury, including former KRA Commissioner General Michael Waweru, investment banker Jimnah Mbaru and former KenGen CEO Eddy Njoroge, were close to the Kibaki Administration.
With Mr Kibaki out of power and the standard gauge railway line seen as major competition to the meter gauge (which is run by RVR), this seems like a good time to exit.
For Citadel, it appears their comfort for now is that they hold a 25-year concession to run RVR.
The Egyptians may also be taking some assurance in the fact that no other investor appears willing to take the bold step to link East Africa, South Sudan, Sudan and Egypt by rail and the Nile to create a logistics and transport corridor going right up to North Africa and possibly into Europe.
But whatever the undercurrents, TransCentury has put on a brave face.
“The transaction [sale of its 34 per cent stake in RVR] was in line with TransCentury’s overall strategy to maximise the value of its investments for its shareholders,” said a joint statement by TransCentury and Citadel.
However, TransCentury shareholders, especially those who bought into the firm when it listed at the NSE through introduction in July 2011, have yet to reap from their investment.
The shares started trading at Sh50 that July, but closed at Sh27.50 on Friday last week, nearly 50 per cent down from the listing price.
But despite the share price dipping significantly, the business is growing its profits, as per the latest available results.
In the six months to June 2013, TransCentury reported its net profits had increased by 17 per cent to Sh380.6 million from the same period the previous year.
The growth in profits was largely as a result of “improved gross margins attributed to improved management of direct costs within our Power Infrastructure and Engineering businesses,” the management said.
With TransCentury’s exit from RVR, the investment firm will only be just these two divisions — power and engineering. A few years ago, TransCentury ditched the consumer division by selling Chai Bora, a Tanzanian tea blender and packer.
So where will TransCentury invest the proceeds from the RVR sale?
They could go towards shoring up the power division, which is not doing too well.
East African Cables reported a drop in net profits to Sh398 million in the year ended December 2013, down from a net profit of Sh522 million the previous year.
The company said this was because of the low demand for its products in the Kenyan market, which has forced it to look to the export market for growth.
“The group is focused on regional diversification and product development to expand its revenue base and return more earnings to its shareholders,” East African Cables said in the statement accompanying its 2013 results.
GROWING URBANISATION
The power division also includes South Africa-based Kewberg Cables, Tanelec Limited in Tanzania and DRC-based Cableries du Congo.
TransCentury hopes the division will benefit from growing urbanisation across the continent.
Also, the investment firm wants to tap into the energy sector in Kenya as the Government plans to soak up more than 5,000 megawatts of power in the next 40 months.
The Jubilee administration is banking on the private sector through the Public Private Partnership (PPP) model to realise the ambitious plan.
Also, Kenya has recently discovered oil and gas and TransCentury could be planning to use some of its proceeds to get a piece of the sector.
“The initial loss aside, we see this transaction as positive to cash flow in the near term, and it provides flexibility for TCL to concentrate on power and energy related projects, especially in oil and gas, through its subsidiary Civicon,” said SIB analysts.
TransCentury has a 60 per cent stake in Civicon, which has been active in the oil and gas sector where it is servicing firms such as Tullow Oil through construction of access roads and landing pads.
The firm had bid to put up a power-generating facility in 2013 but lost out.
“We believe the firm will continue to look for opportunities especially within Government following the new Public Private Partnership Act 2013, which outlines 47 priority projects in road, commuter rail, airport, power, dams, housing and ports,” said SIB.
bizbeat@standardmedia.co.ke
