South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
Kenya: Mega-mergers face pushback from shareholders and activists
Three of the most significant mergers in Kenya’s history are facing significant challenges from legislators, shareholders, and activists.
On Tuesday 27 August, the communications authority suspended the planned merger between Telkom Kenya and Airtel Kenya, which would have built a formidable competitor to telco behemoth Safaricom.
- The authority’s communications head, Christopher Wambua, said that the merger had been suspended until the companies satisfy several conditions and the entire transaction is cleared by the anti-corruption commission.
- Two weeks ago, the anti-corruption asked the regulator to suspend the merger until it establishes how the deal was brokered.
One key problem is that Telkom Kenya has a government stake, which makes any attempt to change its ownership a public matter. As a former state company, it holds significant physical assets, some of which it has put on sale.
- In the letter by EACC CEO Twalib Mbarak, he pointed out that his agency was also investigating a 2012 decision to convert Treasury loans to the telco into equity.
- Telkom Kenya was privatized in December 2007 when France Telecom bought a 51% stake. It later sold its stake to Helios Investment, a private equity firm, by which time it had grown to 70%.
- In March this year, a Parliamentary committee raised several issues on the proposed merger raising the same issues, and summoned government agencies to explain it.
“The commission is investigating an allegation of misappropriation of public funds in the process of recapitalisation and restructuring the balance sheet of Telkom Kenya Limited in the year 2012 and the current merger of Telkom Kenya with Airtel Kenya,” Twalib Mbarak wrote in the letter to Communications Authority seen by Business Daily.
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Second biggest lender
Another big merger, between CBA and NIC banks, is the subject of a court case because of a more than Shs. 350 million tax waiver on stamp duty.
- The proposed merger, which was announced in January, will create Kenya’s second biggest lender with “…a complementary base of over 38 million customers, a strong digital proposition and a robust corporate and asset finance offering,” according to a statement by CBA.
- Okiya Omtatah, a Nairobi activist who filed the case in mid-August, argues that there’s no public interest in exempting the lenders “which are private profit-making entities, from paying the share transfer tax dues.”
- The tax waiver was signed by embattled Cabinet Secretary Henry Rotich in June but only made public in August, triggering the lawsuit.
The tax waiver is a particularly emotive issue because of who owns the two banks.
President Uhuru Kenyatta’s family, one of the richest in Kenya, holds a 24.92 percent stake in CBA, while the family of Philip Ndegwa, Central Bank Governor between 1982 and 1988 owns a 25 percent stake in NIC Bank.
The third major acquisition, where KCB Group will fully acquire struggling government lender National Bank, has attracted opposition from the latter’s shareholders as well as legislators.
- In April, KCB Group announced its plan to acquire NBK in a deal valued at Shs. 6.1 billion. The expectation was that the acquisition would go smoothly because the two lenders share two majority shareholders, the government and the social security fund.
- The deal will cement KCB Group’s position as the biggest bank in Kenya by market share, even further buttressed by the fact that the company is also acquiring collapsed mid-tier bank Imperial Bank.
Interestingly, a parliamentary committee recommended in early August that the two bank’s primary shareholders reject the acquisition and find other ways to fund the National Bank of Kenya.
In the committees’ view, NBK was actually the stronger bank with its 86 branches and 40.4% liquidity ratios. “The offer given by KBC does not reflect the fair value of NBK,” the Finance and National Planning Committee’s report said.
- In July, National Bank’s board recommended to the lender’s shareholders that they consider KCB’s offer because “although NBK remains a strong bank, it requires additional capital to meet regulatory capital requirements and to grow its business, which capital can be provided by KCB.”
- In the letter, the board also pointed out that the offer had undervalued NBK by almost 38 percent, according to an independent evaluation. In early August, the Capital Markets Authority said that the acquisition offer would go through if it was accepted by two thirds of National Bank’s shareholders.
- In the takeover proposal, NBK will operate as an independent subsidiary for one year.
During the release of KCB Group’s half year results, CEO Joshua Oigara said that the Imperial Bank and National Bank acquisitions will go on “despite the ongoing restriction.”
It looks like this one will go through:
Press release: Acquisition of National Bank of Kenya Limited by KCB Group PLC. pic.twitter.com/d6r3r5HbtM
— Central Bank of Kenya (@CBKKenya) September 2, 2019
Why all these matter:
For market watchers, the ongoing mergers and acquisitions are a live experiment of the strength of Kenya’s corporate giants to handle such transactions, and of the legal system to regulate and facilitate them.
- While the immediate motivations are a slowing economy, the need to reduce market fragmentation, improve competition, and fight corruption, there will be many lessons to learn from whether these three mergers fail or succeed.