KQ moves to end ‘abusive’ union with Dutch Airlines, KLM

The ‘abusive’ marriage between Kenya Airways and Netherlands’ Royal Dutch Airlines (KLM) might be headed for an uneventful divorce.

KLM has already, at least in principle, agreed to this fate. But it must have been a bitter pill to swallow for the Dutch Airline which had such unfettered control over the national carrier.

A new financial restructuring plan by the cash-strapped airline proposes to scrap a 22-year old agreement that thrust KLM into the heart of the national carrier’s ownership and management. The agreement turned major shareholders such as the Government of Kenya into mere pawns in the European’s airline grand plan of ruling the skies.

The Dutch airline which has since 1995 been calling the shots at Pride Centre through an agreement that the Government naively signed with it to save troubled KQ, will now have to shed close to half of its 26.73 per cent shareholding.

KLM will have to contend with a 13.71 stake in KQ in a new ownership structure that will see the Government increase its shareholding from 29.8 per cent to 46.53 per cent, even as KQ gets new owners in the form of 11 banks that the Nairobi Securities Exchange-listed company owed about Sh22.5 billion.

The Government and the 11 banks will convert their debt into equity through a complicated debt restructuring plan which is aimed at stopping hemorrhage in the airline, even as KQ aims to cruise into the calm skies of profitability. The airline, which made a record Sh26.2 billion after-tax loss in full year ending March 2016, seemed to turn a corner in the next year when it reduced the loss to Sh10 billion.

The termination of the skewed agreement, according to a circular to shareholders signed by the airline’s chairman Michael Joseph, marks the beginning of what they believe will “further enhance the benefits to the company.”

For a company that enjoyed privileges such as the appointment of directors, sale of aircraft, route network and a say in allotment and issue of any shares in the capital of KQ, this development will certainly leave KLM so impotent that it will have almost no incentive to stay in the marriage.

KLM’s absolute authority extended to all the aspects of the company, including approving the sale of any shares held by the Government. Indeed, under the current arrangement, an objection by a single KLM director is enough to overturn a resolution passed by the 12-member board.

Michael Joseph, the former CEO of telecommunications firm Safaricom, in an interview with Weekend Business alluded to the end of KLM’s reign at Kenya Airways.

He noted that while KLM will continue participating in decision-making at KQ, the Dutch airline will not wield as much power as it did in the past. “KLM will not appoint anyone to the management but as part of their enhanced in-kind contribution we will ask them for more technical and management support which might include some temporary skilled people,” Joseph said. “KLM will retain one seat on the Board as long as their equity does not fall below five per cent.”

He said the parties will amend the venture agreement. “We will look to revise the joint venture agreement for the mutual benefit of both parties,” he said.

Joseph said a new agreement would be for the benefit of both KQ and KLM. The old agreement signed between the two airlines in 1995 prior the finalisation of the deal in 1996 will be terminated.

In the circular, KQ board said that the “long-standing joint venture agreement” between the two airlines would “further enhance the benefits to the company.”

“In addition, KLM and KQ will be amending their long-standing joint venture agreement to further enhance the benefits to the company. Under the proposed cooperation agreement, the shareholders agreement entered into between the Government and KLM at the time of KLM’s initial investment in the company in 1995 will be terminated,” said the airline in a circular signed by the board’s chairman.

KLM’s fate is expected to be sealed during an Extraordinary General Meeting (EGM) to be held on August 7. KLM will be left with a 13.71 per cent stake.
 

However, should the resolution pass, other minority shareholders will also be diluted by 95 per cent- a situation that Kenya Airways sees as a necessary sacrifice by a few for the bigger good of the airline. Diluted investors will, however, be offered an opportunity to re-invest into the company.

A group of 11 banks, under a special vehicle known as KQ Lenders Company Limited, will edge out KLM from the second position by raking up 35.69 per cent shareholding following a debt restructuring scheme that saw the lenders and Government convert their debts into equity.

On January 11, 1996, Kenya Airways and the Royal Dutch Airlines (KLM) finalised a deal where KLM acquired a 26 per cent stake in the Kenyan carrier for $26 million (Sh2.69 billion at the current exchange rate).

This was the culmination of the plan to privatise the airline that had started way back in 1986, with the publication of the Sessional Paper No 1 of 1986 ‘Economic Management for Renewed Growth, which talked of Government divesting from state corporations. The plan gathered momentum in 1992, when the airline’s board was given the mandate to privatise it.

Royal Dutch KLM was picked to steer KQ’s revival in a contest where British Airways and South African Airways were reported to have also bid. Other than the 26 per cent stake sold to KLM, the Government sold another 51 per cent to investors through an Initial Public Offering in March of 1996 and retained a 23 per cent shareholding, but has over time clawed some stake to stand at 29 per cent.

The agreement signed on January 11, 1996 by Rob Abrahamsen the then managing director and chief financial officer KLM and Brian Davies the then managing director at Kenya Airways may be termed as poison pill due to clauses that gave immense power to the Dutch airline.

Though the two airlines had officially gotten into what was termed as a joint venture, KLM had an upper hand in making decisions on a wide range of issues that included appointment of directors, sale of aircraft, determining KQ’s route network and the allotment and issue of any shares in the capital of the company.

Thus, KLM has over the years made the strategic decisions while its directors sitting on KQ’s board could veto decisions even in instances where the other directors were unanimous.

KEEP THE AIRLINE AFLOAT

Joseph said the agreement that gave the Dutch airline all the power would be revised. The revision of the agreement is likely to give the Government – which will now own close to 50 per cent stake – an upper hand in the running of Kenya Airways. This will set the airline back some 20 or so years when through the 1996 deal, it was handed over to the private sector while the Government took a backseat.

While it will not have the control it has had over time, KLM will remain critical in the restructured KQ, according to the circular issued by the board to shareholders last week which details a raft of measures that shareholders will undertake to keep the airline afloat.

“Both KLM and the Government will remain key strategic shareholders in the Company going forward via a combination of converting loans (in the case of Government) into equity and through the investment of new capital (in the form of in-kind contributions) in return for the issue and allotment of Ordinary Shares,” said the circular.

Among the roles that KLM will play in the restructured KQ include the injection of new capital and in-kind contribution, all of which add up to Sh7.9 billion. According to the document, KLM will subscribe for additional new ordinary shares in KQ through the $26.5 million (Sh2.7 billion) of in-kind contributions.

The in-kind contributions will include offering KQ the London Heathrow slots (which KQ has been leasing from KLM) as well as offering KQ IT systems and support.

KLM will also inject Sh2.5 billion through a subscription to ordinary shares in KQ and a further Sh2.5 billion of in-kind contributions following the completion of the restructuring.