Bye Bye Nairobi Security Exchange

BY JACKSON OKOTH AND EMMANUEL WERE

NAIROBI, KENYA: There is an interesting trend emerging from companies bidding farewell to the Nairobi Securities Exchange when strategic investors acquire them and take them private.

A couple of years from now, the main shareholders in Access Kenya, CMC Motors and now Rea Vipingo will take on the role of proverbial economic giraffes.

KenolKobil, the oil marketer, whose takeover attempt by Puma Energy did not succeed earlier this year, would also fall on the list.  The Puma acquisition might have fallen through but KenolKobil has hinted that it is still in the market searching for a suitable partner.

As these companies look into the future, they have either seen a business tsunami that would wipe them out and make their economic model irrelevant or they are seeing a golden opportunity too good to be shared with other impatient shareholders. And what better time to strike, because the stock market this year is trading at levels last seen two years ago. 

This offers a good pitch for the main shareholders selling or buying out minority shareholders because it is easier to convince the public to let go of shares, which have underperformed when the bull-run is on.

Also, a common thread in the three firms is that they are either held by families – Access Kenya and Rea Vipingo – or a network of business buddies, with old and new money in the case of CMC Motors.  On the flip side, the minority shareholder has consumed so much news, mostly bad, be it board room wrangles, record losses and suspension in trading of their shares that selling their shares and getting out is a welcome relief. London-based REA last week announced it wants to buy out the rest of the shareholders in REA Vipingo, the NSE listed sisal producer. 

Two British brothers – Richard and Jeremy Robinow own REA Trading and also have interests in REA Holding, a company listed on the London Stock Exchange. REA Holding and REA Trading own 36.47 and 20.57 per cent respectively in REA Vipingo.

The two brothers need to get approval from shareholders who cumulatively hold a 75 per cent interest in REA Vipingo.  This would mean Robinow’s need to sweet talk and cajole about 38 other investors who cumulatively own 80 per cent of REA Vipingo, according to its 2012 annual report.  If this happens, the other 6,000 shareholders would have to accept the price of Sh40 per share, which is 45 per cent above the Sh27.50 REA Vipingo’s stock traded before it was suspended last week when the offer was made.

The premium on the offer price is within the same range that Access Kenya shareholders were offered by Dimension Data. But there are concerns that the price offered is too low.

“I have been getting many calls from shareholders who do not want to get out of REA Vipingo,” said Bob Karina, executive director of Faida Investment Bank and also the vice-chairman of the NSE.  “Everything you have is for sale provided you get the right price for it,” said Mr Karina. “Some of the shareholders think that the Sh40 they are being offered is undervaluing the stock. The stock is much more than they are being offered.”

The point of contention has to do with the 70,000 or so acres of land on which REA Vipingo sits on both in Kenya and in Tanzania. How do you value this prime piece of property, especially since there is a property boom in the region?

Two things though are certain. Sisal prices at between $1,200 and $1,500 per tonne still remain attractive. However, Rea Vipingo has seen a decline in profits and sales, in the six months to March 2013.

Its financial year starts in October. Rea Vipingo, which is the largest sisal fibre producer in Africa, saw its sales drop marginally to Sh1.24 billion in the six months to March 2013, compared with Sh1.25 billion a year ago.

Net profits dropped 8 per cent to Sh190 million in the six months to March 2013. Not forgetting that net profits in the full year to September 2012 had also dropped.

“Whilst the sisal fibre market remains at a remunerative level, the volatility of the global economy is having some impact upon certain of our markets and it is difficult how this will evolve in 2013,” reads the statement by Oliver Fowler, Chairman REA Vipingo signed on January 14, 2013.

Exactly 11 months since Mr Fowler signed that statement the outlook has become worse. Or the company wants to take another direction, hedging their risks against the “volatility of the global economy”.

Most of the retail investors would argue that if the company’s fortunes in the sisal market is declining, why not convert the piece of land into real estate.  It is a dilemma, which faces many agricultural companies at the NSE.

The listed agricultural firms include Limuru Tea, Sasini, Williamson Tea and Kakuzi.

Should exits from the market worry the NSE as an attractive market for companies to list? Is the NSE market too small to attract the big players?

Officials at the NSE choose to look at all these de-listings in another light.  “While we prefer to have more companies listing, it is important that firms know that the decision to list and to delist is within their control. This is a concern prospective issuers share with us when we see them about listing on the Securities Exchange,” said Donald Ouma, head of product and market development at the NSE.

Mr Ouma adds that it is because of their listing that each company has been able to use their profile and the accessibility of the financial statements and books of accounts to attract a buyer; the due diligence is easier. “Their listing makes it easier to value the firms and for a price to be derived; facilitating the transaction,” Mr Ouma said referring to Access Kenya, Rea Vipingo and CMC who all listed their shares.

Ewart Salins, the Regional CEO east Africa of African Alliance Securities says that for many local companies there is so much value they can add as a local investor.  “It does make sense to have a strategic investor who can add value to the company,” he says giving the example of KLM and Kenya Airways, where the Dutch carrier has a 26.73 per cent stake in the Kenyan carrier.

Both airlines have developed a code share agreement where they pass on the passenger traffic on certain routes. Ken Kaniu, a fund manager at Stanlib, said that some of the strategic investors are buying the firms so that they get total control. “Some of the companies were originally not doing well anyway. So the strategic investor would want total control and a new strategy to turn around the firm’s fortunes,” Mr Kaniu said.

He adds that some of the Kenyan owned family businesses which have grown over the years – such as super market chains – Nakumatt, Tuskys and Naivas – have a capital structure where they are relying on bank loans and other sources of funding. But they might eventually end up coming to the market.

“From a capital perspective, when they (family owned businesses) come under pressure from the rate at which they are growing, you will see them come to the market. For now they are happy to operate under the radar,” he said.

Indeed, Mabati Rolling Mills - a dominant player in roofing solutions - associated with the Chandaria Family has come to the market. However, it was not to sell shares but to borrow through issuance of several bonds. The latest was a Sh2 billion bond, where shareholders will get repaid their principle in 2016.  It shows perhaps the family owned businesses are looking for money but do not want to let go of the control.

At the same time the NSE and the Capital Markets Authority are encouraging some of the small and medium companies to list at the Growth Enterprise Market Segment (GEMS). So far only one company, Home Afrika – the real estate developer – has listed. It is understood that there are four more companies to come. But even their listing might not be enough to leave the space left by the exit of Access Kenya, CMC and Rea Vipingo, if the latter two leave.

The question then is perhaps are the regional countries – Kenya, Uganda, Tanzania, Rwanda and Burundi better off coming with one large stock market that has an appetite to list so many more firms. After all, most Kenyan firms are expanding into the region and one way of attracting more interest is to list in the other markets.