Centum versus UK’s Robinow brothers: A case of barbarians at Rea Vipingo’s gates?

By EMMANUEL WERE

KENYA: For the next few months, Rea Vipingo shareholders, and Kenyan investors at large, should acquaint themselves with one of the best business books published in the last 30 years, Barbarians at the Gate.

This will help them understand and appreciate the drama that is set to unfold as British Robinow brothers — Richard and Jeremy — square it out with investment firm Centum for the control of Nairobi Securities Exchange-listed Rea Vipingo, the largest sisal producer in Africa.

The classic must-read Barbarians at the Gate was published in 1989 and centres on a bid by the chief executive of RJR Nabisco, a US tobacco and food products firm, to buy out other investors and take the company private.  

The allure of the firm is that it generates a lot of free cash, especially the tobacco side of it, and the CEO feels it is better for the company to be in private hands than continue being privately listed.

The CEO at RJR Nabisco brings together other managers and investors to borrow money, buy out all the other shareholders, run a more efficient and lean company and keep all the profit. This is known as a leveraged buyout (LBO).

In the late 1980s, LBOs were in fashion. It was a way for shrewd investors to take private companies they thought were highly undervalued at stock exchanges.

The CEO of RJR Nabisco and his fellow managers thought it would be plain sailing – borrowing money and buying out the other shareholders. But they were wrong.

Another set of investors presented an even higher bid for the shares, kicking off a bidding war. In the end, the CEO and managers of Nabisco were outbid.

Centum, which is listed at the NSE, seems to be reading from the script as Barbarians at the Gate.

Aggressive

The investment firm last week took on the Robinow brothers with an offer of Sh50 per share to the other shareholders in Rea Vipingo.

This is better than the Sh40 per share the Robinow brothers, through their REA Trading Company, had offered shareholders mid last month.

Rea Vipingo shares last traded at Sh27.50 in November before they were suspended.

While this looks set to be an engaging game of chess, there are many questions that will arise: Will the Robinow brothers come up with a better offer, say Sh60 per share? Why are the Robinow brothers so interested in taking Rea Vipingo private? How aggressive is Centum willing to get for the sisal producer? Is Centum only interested in the 70,000 acres Rea Vipingo sits on in Kenya and Tanzania?

The Robinow brothers will be in town this week, arriving from London where they oversee their plantation businesses.

The two 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, effectively putting the brothers’ control at 57 per cent.

They will need to buy at least 75 per cent of the shares for the deal to go through.

But with the Sh50 offer, Centum wants to spoil the party and buy more than 25 per cent of REA Vipingo’s shares.

The Robinow brothers had probably overlooked the influence Centum, which has a 0.5 per cent stake in Rea Vipingo, would have on the whole transaction. 

It is the same mistake the CEO of RJR Nabisco made with the other investors and shareholders.

It appears the brothers were so confident of success that they even went ahead to secure Sh694 million from CBA to secure the transaction, which will cost them about Sh1.03 billion. The brothers have already deposited another Sh347 million with the bank.

This makes it a leveraged buyout. 

In all this, the question is what are the investors up to?

Nearly everyone in investment circles is of the opinion that Centum is eyeing the land on which Rea Vipingo sits. At about Sh35,000 per acre, everyone thinks Rea Vipingo’s real estate is really undervalued.

Centum has been very aggressive in setting up real estate projects across the region. They have the Two River development in the upmarket Runda estate in Kenya and the Pearl Marina in Uganda. And with the real estate boom in the country, Centum almost cannot go wrong with this transaction.

However, according to those who are familiar with Centum’s thinking, the investment firm is unlikely to convert all Rea Vipingo land into real estate.

“Why would they convert the whole 70,000 acres into real estate? That would destroy the value of the land. Where would they get the demand?” asked a source who requested anonymity. “If they are to go aggressive with the real estate, they would need just 100 acres.”

But if Centum might appear clueless about what to do with all that land, the Robinow brothers appear to have a clear strategy.

Rea Vipingo is the largest producer of sisal on the continent. This gives them a very good monopoly where they can control prices by cutting back supply.

It is what Aliko Dangote, the richest man in Africa, did at one time when he was faced with a lot of competition in the sugar market in Nigeria.

When new entrants were joining the market, Dangote increased the supply of sugar, leading to a drop in prices of the commodity. The competitors could not survive for long on the low prices, and they ended up closing shop.

But the problem the Robinow brothers face is that sisal already faces competition from many synthetic materials.

Still, it is used for high-quality sisal carpets, buffing cloth for various industrial polishing applications, cores for wire ropes, dartboards and various handicrafts, with sisal pulp used in the manufacture of speciality paper.

New crop of billionaires

If the Robinow brothers decide to cut back on sisal, they might actually go big on another plantation crop whose potential is immense in the region: crude palm oil.

The brothers have extensive knowledge on growing oil palm in Indonesia through REA Holdings.

Crude palm oil is used in soaps, cosmetics, cooking oils and other food ingredients. The bigger picture with these products is that they have produced the new crop of the region’s billionaires.

There is Vimal Shah and family who control the cooking oil and soap business, which has made them billionaires. Interconsumer Products’ Paul Kinuthia is a billionaire who has made his money from cosmetics.

So the tactical switch by the Robinow brothers would be cutting back on sisal production, which would favour them as they control the market and can increase the price.

Then they would bet big on growing crude palm oil, a crop that can potentially make them quite wealthy.

Also, Rea Vipingo has closed the past two years with a negative balance on its cash flow statements, and palm oil could be a boost.

And to cap it all, they would revive Vipingo Estate Limited, a subsidiary of Rea Vipingo focused on real estate, to develop some of the land.

But to pull off all these moves, the Robinow brothers probably need to get rid of the scrutiny of the public and the NSE.

The other question is, if Centum is taking over Rea Vipingo and valuing the company at Sh50 per share, then it will have to have about Sh2.98 billion to buy out all the other shares it does not own in the agribusiness firm.

Negative balance

Does Centum have this cash? The investment company had Sh896 million in cash at the end of September 2013, when it reported its half-year results for the period that started in April.

If Centum is to buy out all shareholders in cash, it will have to borrow to finance the deal. This means it will be leveraging the company even more, since the company so far has Sh4.15 billion in borrowing.

In the past two years, Centum has been aggressively acquiring companies — from fund manager Genesis Kenya to the pay day lender Platinum credit.

Going by the Rea Vipingo deal, is it possible that Centum has been aggressively bidding and paying too much for some of its acquisitions?

As Warrant Buffett has said: “Only when the tide goes out do you discover who’s been swimming naked”.

Right now, the tide has been high and investors have been aggressively bidding to buy shares and companies at the stock market.

It is only when the bear run ends, and a few years down the line, that we will find out who between the Robinow brothers and Centum made the wrong bet by borrowing cash and paying a steep price.

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