Intrigues that saw Sh18 billion Panpaper sold off for Sh900 million

The engines at the Pan-African Paper Mills went silent on a Friday morning in March 2009.

There were less than 10 days left to payday for the 1,000-plus employees of the paper manufacturer. And as they streamed in one by one to a firm some had worked at for more than three decades, they came across the shock of their lives.

First, there was a huge padlock on the gate. The Indian managers appointed by the Birla Group of India, which owned just about a quarter of the miller, were nowhere to be seen.

The huge plume of smoke and pungent smell that were permanent features of Webuye town had started to die down.

No fine paper, liner, board, kraft or newsprint was rolling off the machines. The engines had gone quiet.

Ghost town

The bewildered group eventually came across a small notice informing them their company, better known as Panpaper, had been placed under receivership from that morning, March 20, 2009.

Not many locals understood what receivership really meant, but they eventually came to understand it had rendered them jobless and turned their once vibrant neighbourhood into a ghost town.

Just a few of the technical employees would be required on site to take care of the machines in shifts; the rest were asked to go home until they were recalled.

It was impossible to imagine it would take seven years for the lucky ones to be recalled. Especially when you consider that the Government held a 40 per cent stake in the company, and it had deep-pocketed shareholders like the International Finance Corporation (IFC).

The IFC had given the miller a Sh5 billion ($50 million) loan, but it was struggling, and only managed to pay off about half the debt. It had Sh2.6 billion ($26 million) outstanding. In addition, the firm had a total debt portfolio of long-term loans of Sh7.2 billion, which sank it into seven years of trouble.

But as Panpaper’s engines prepare to roar back to life in the sleepy town of Webuye, Bungoma County, intrigues surround its sale, which was cemented last week.

Employees lucky enough to be called back to work to witness the company’s rebirth may never know how the miller, which was valued at Sh18 billion at the time it was placed under receivership, ended up being disposed of at Sh900 million.

This means that for every Sh20 Panpaper was worth, the new owners paid Sh1.

Before that fateful Friday in March when Panpaper finally caved in under the pressure of its debts, Kieran Day and Ian Small had been appointed the joint receiver managers by its short-term lenders. The two made the first attempts to prevent the company shutting down.

They had the support of the Government, which had already pumped in Sh2 billion and written off some taxes in a bid to make the firm lucrative to a buyer. It had also transferred all the debts owed by the paper manufacturer to short-term lenders, and paid them Sh400 million.

Interested parties

With Panpaper’s assets valued at Sh18 billion, the receiver managers were brimming with confidence when they put out an international call for bids to draw investors.

The process attracted six interested parties. However, only two put in financial bids — Rai Group and Juja Pulp and Paper Mill Ltd based in Ruiru.

At first, Rai Group put in a bid of about Sh360 million, underestimating its competitor. Juja Pulp and Paper Mill, which is associated with the Gudka group of companies, went on to offer Sh1 billion.

Rai Group, sensing defeat, put in a counter of Sh100 million more than what Juja had offered. With a Sh1.1 billion bid, it became the front-runner.

But the process took a twist when one morning, without notice, Day and Small resigned. Though their reasons for resignation were kept under wraps, it is understood that they fell out with the Ministry of Industrialisation, which they accused of interfering with the sale process.

Day and his partner felt like the Government was keen on a specific outcome, instead of allowing the process to reach its logical conclusion.

After the resignations, a second receiver manager was appointed — Kuria Muchiru from PricewaterhouseCoopers (PwC).

Mr Muchiru said he hit the ground running and invited all the six participants who had shown interest back to the table.

“We reached out to all of them and asked them to put in their bids. But four did not do so,” Muchiru said last week.

Juja Pulp also did not participate in the second round, leaving Rai alone in the field.

Immediately after the exit of Juja Pulp, Rai revised its bid downwards to Sh900 million. This is what ended up in last week’s process.

“We invited another firm, which does the job that we do, to audit the process and we have a certificate that says that’s the best deal we could have got,” Muchiru said, defending the revision of Rai’s bid downwards by Sh200 million.

Panpaper started its operations at almost the same time Indian billionaire Tarlochan Singh Rai and his four sons were starting a small timber company in Kenya.

Business empire

Four decades later, the Rais had built their timer firm into a family empire called the Rai Group. They now own the paper mill.

One of Mr Tarlochan’s sons, Jaswant Rai, who is the chairman of the group, is expected to switch on one of the four production lines at Panpaper in about four months’ time.

The paper mill will join the Rai business empire, which has interests in agroforestry, farming, saw milling, wheat farming, edible oils and fats, as well as sugar. Rai Group has a presence in Kenya, Uganda, Tanzania and Malawi.

To honour their father’s legacy, the Rais have name the subsidiary that will take over the running of Panpaper Tarlochan Limited.

Rai’s investment into Panpaper is set to go towards off-setting the debts the mill owed. The manufacturer’s long-term lenders included Kenya Commercial Bank (KCB), East Africa Development Bank, East and Southern Africa Development Bank, Development Bank of Kenya, and Noon Day Asset Management Asia PTE. These have charges on 90 per cent of the assets.

These loans were secured by the company’s fixed assets and were not guaranteed by the Government.

“Previous attempts to restart [Panpaper] were unsuccessful, and we are happy that the company has been rescued from receivership. Whereas lenders may not have actualised the full recovery of their debt, a greater gain with potential positive long-term prospects for the region has been realised,” Muchiru said.

By the time Panpaper was being placed under receivership, Birla Group of India had bought a 24.93 per cent stake from IFC.

Directly, taxpayers controlled 33.8 per cent of the company, and another 6.2 per cent indirectly through different Government agencies.

Oriental Paper Industries owned 29 per cent, while Industrial and Commercial Development Corporation (ICDC), Development Bank of Kenya and Barclays Trust held the remaining stake.

The news of Panpaper’s revival coming the same week the Government wired another Sh1.1 billion to Mumias Sugar Company as part of a bailout package is set to earn President Uhuru Kenyatta’s administration some political capital in Western Kenya.

“The investment will yield close to 1,500 jobs for the people of Bungoma and Kenyans in the next three years,” President Uhuru said when he broke the news of the deal last week.

Rai Group will now have access to all Panpaper’s land, estimated to be more than 200 acres, schools, a stadium, machinery and other assets.

The production site for the mill is sited on a 169-acre plot that hosts pulp and paper production plants.

There is also machinery, office blocks, a clinic and caustic soda and chlorine plants.

Other plots adjacent to the main site include effluent treatment ponds, a railway siding and weighbridge, primary and secondary schools, a guest house and executive staff complex, three housing estates, and sports and cultural facilities.

Situated adjacent to River Nzoia in Webuye, the firm operated four paper machines, producing on average 100,000 tonnes per annum of paper products.

Full capacity

Details of the deal indicate that Rai Group, which boasts reviving Tanzania’s Mufundi Paper Mill, which it acquired under similar circumstances, will pump in Sh6 billion into Panpaper over the next five to 10 years.

Mr Jaswant fought off claims that his company is a timber merchant interested in the land and licences owned by the paper miller, which would enable it grow its business.

“Our long-term plan is to rehabilitate the main plant to ensure restoration of its full capacity. We have the requisite capacity to undertake this investment, as demonstrated by a similar operation in neighbouring Tanzania, which we turned around successfully,” Jaswant said.

The plan is to first rehabilitate one of the four manufacturing lines that the company has, which will see it start with a capacity of about 30,000 tonnes of products a year.

The company expects to turn on the engines at the firm in four months after making the necessary repairs.

One of the main challenges is obsolete technology and the long time it takes to get spare parts, such as boilers. Jaswant said it takes between 18 and 30 months to ship a new boiler to Kenya.

Industrialisation Cabinet Secretary Adan Mohammed added that the Government would give Rai Group the necessary support, including securing titles and forestry licences.

Rai had demanded that the Government ensures approval of Panpaper’s Kenya Forest Service licence. It also wanted the National Land Commission (NLC) to issue titles for all untitled properties belonging to the paper miller. In addition, the firm wants all title documents owned by the miller to be transferred to the Rai Group.

All that is left now is to wait and see if Panpaper’s machines will indeed be switched back on in August.

pwafula@standardmedia.co.ke