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Mumias Sugar creates sticky problem for KCB top brass

By Morris Kiruga, in Nairobi
Posted on Tuesday, 1 October 2019 11:43

In the sugar cane fields of western Kenya, farmers complain that falling prices mean they can barely make ends meet. Yet rival African producers can still offer cheaper supplies. With much of the production coming from small rain-fed plots rather than large irrigated plantations, costs are much higher than Kenya's competitors. REUTERS/Thomas Mukoya

Kenya Commercial Bank placed Mumias Sugar, the biggest sugar producer in the country, under receivership on September 20.

The struggling sugar miller has also been suspended from the Nairobi Securities Exchange (NSE), as the move by KCB draws mixed reactions.

The lender appointed a receiver manager, PVR Rao, who arrived at the sugar company’s headquarters on September 24 under police escort.

KCB, which is the second-largest shareholder of the company after the government, and other lenders are demanding $120.4m from the loss-making miller.

  • Mumias Sugar was privatised in 2001, with the government reducing its shareholding to 20 %. KCB owns a 1.72 % stake and 65 % of the company is publicly traded on the NSE.
  • The company has been technically insolvent, with its last financial statements showing that its liabilities far outstrip its assets. Despite several government bailouts in the last four years, it has continued to haemorrhage money as it also tries to settle its multiple debts.
  • Its losses for the year ending June 2018 rose to $145.4m from $65.5m the previous year. It is yet to release its latest results, which would most likely show even bigger losses as its primary income-generating activities have either been halted or affected in the past year.

KCB’s move effectively halts other plans to revive the company, which include an ongoing one led by the Kakamega County Government to acquire and turnaround the troubled miller.

Other than KCB, the miller also owes $96.2m in back taxes, and $11.5m to the power utility company, Kenya Power.

Other than having Kenya’s biggest sugar production capacity, Mumias Sugar is also a power producer (34MW capacity) and also produces ethanol and water.

  • The company stopped producing sugar in April 2018 because of what it said was a shortage of raw materials, thus leaving ethanol production as its only source of income.
  • Although it primarily blamed other sugar companies for poaching its farmers, its financial crisis over the past few years has left it unable to pay its bills to farmers.

Because of its core economic role in Kenya’s Western region, its latest fate has elicited mixed reactions from leading politicians.

  • For example, Kakamega Senator Cleophas Malala and several activists visited the miller on the receiver manager’s first day, demanding a meeting of stakeholders.

Malala’s predecessor, Boni Khalwale, posed on Twitter that the government was placing its own company under receivership.

Bungoma Senator and opposition leader Moses Wetangula also weighed in.

At its incorporation four decades ago, Mumias Sugar was supposed to lead the government’s efforts to achieve self-sufficiency in sugar production. Over the past few years, its operations have been hampered by mismanagement, corruption, competition, and a growing hole in its books.

  • A 2015 KPMG forensic report found that the listed company’s leadership from 2001 had not sealed corruption loopholes, and could have personally benefitted from such unscrupulous activities.
  • Among its longest-serving chief executives was Evans Kidero, who resigned after running the company for nearly nine years to become Nairobi County’s first governor in 2013.
  • Kidero, who is currently facing corruption charges for activities during his time as Nairobi’s chief executive, has been investigated for his activities at Mumias Sugar as well.

In January 2019, the company replaced its CEO for the third time in under three years. A few months later, it issued a call for expressions of interest to lease out its sugar estates as part of its latest turnaround strategies.

KCB’s move to place the company under receivership is the most significant attempt at solving Mumias’ many problems.

  • Between 2015 and 2017, Mumias Sugar scooped several government guarantees, amounting to bailouts totalling $33.7m.
  • Government refused a request for yet another bailout mid-last year, and seems to have decided that the miller would be better off under KCB, which also has government shareholding.

The bigger question though, is whether the lender will choose to wind up or revive the company. From the little information available on Mumias’ financial status, the better business decision would be to strip it of its assets and sell them. But the political implications of such a move would be far-reaching.

“Our experience is that once a company is put under receivership, it never returns to profitability,” Jaindi Kisero writes in the Business Daily, “[But] Just pumping in money into the company without addressing the root causes of the problems will not help.”

Bottom line: KCB now has a tough corporate puzzle compounded by the political heat of expectations around Kenya’s largest sugar producer; it risks using up more executive bandwidth than the bank may care to use at present.

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