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Kenya: Why Equity Bank broke off talks with Atlas Mara

By Aurélie M'Bida
Posted on Monday, 6 July 2020 16:00

Equity Bank's Chief Executive Officer James Mwangi addresses investors at the Equity Bank headquarters in the Upper Hill district of Nairobi
Equity Bank's Chief Executive Officer James Mwangi addresses investors at the Equity Bank headquarters in the Upper Hill district of Nairobi, Kenya November 12, 2019. REUTERS/Njeri Mwangi

The Kenyan giant is renouncing the acquisition of African subsidiaries of the British headquartered bank Atlas Mara. A decision linked to Covid-19, but not entirely ...

Atlas Mara – listed on the London Stock Exchange and co-founded by former Barclays boss Bob Diamond, its CEO until February 2019 – and Equity Group Holdings (EGH) have ended their negotiations that began in April 2019.

The transaction involved Equity’s acquisition of a 62% stake in Banque Populaire du Rwanda (BPR) and all of Atlas Mara’s subsidiaries in Zambia, Tanzania and Mozambique (BancABC). In exchange, Atlas Mara was to obtain a 6.3% equity stake in Equity Group, representing 252.2m shares with an estimated value of $105.4m at the time.

EGH is the parent company of the Equity Bank banking group ($400m in revenues in 2018), the second largest in Kenya and also present in Rwanda, Uganda, South Sudan, Tanzania and the DRC.

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The halt in negotiations “was largely motivated by a change in EGH’s strategy in view of the effects of the Covid-19 pandemic worldwide and on the economies in which [Equity Group] entities operate,” Atlas Mara explains in its statement.

Difference in valuation

The discussions announced in April 2019 had not led to a signature by early January 2020, when the deadline set by the preliminary agreement expired.

A situation that did not surprise analysts at the time: “Equity Group Holdings did not reach an agreement with Atlas Mara in December 2019 because, given the market conditions at that time, Equity had to reconsider the transaction due to the difference in value between Equity and the four banks the group was considering acquiring,” says David N. Gitau, financial analyst at Cytonn Investments Management in Nairobi.

“The deal was announced in April 2019 and since then the outlook for Equity Bank has improved due to the removal of the interest rate cap in Kenya, which has created a rally in the share price of Equity Group Holdings,” the analyst said.

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Between May and December 2019, Equity in Nairobi rose from 40.9 to 53.5 shillings, “As such, Equity Group Holdings should have paid more in the deal, given the share price at the time,” says David N. Gitau.

Failure to find “mutually acceptable commercial terms”.

In its June 23rd press release, Equity Bank admitted that in January the two parties were still struggling to reach “mutually acceptable commercial terms with respect to the proposed transaction”.

While the Equity Bank communication announces a pause in discussions “for the foreseeable future”, this is not reflected in Atlas Mara’s text, which states that it is focusing on its “objective to complete, to the extent possible, a strategic transaction”. Without specifying with whom, for the time being.

Pandemic effect

The Covid-19 crisis has disrupted already difficult negotiations.

The Equity share remained close to a price of 50 shillings during the first months of the year before melting from March, in the wake of the first cases of Covid-19 identified on the continent. It is trading around 35 shillings today.

In the meantime, the Atlas Mara share has slumped 70% in London where its price is around 0.48 dollar. At the beginning of 2014, shortly after its introduction in London, Atlas Mara shares were worth 11 dollars.

The Kenyan group explains the end of trading by uncertainty that led Equity Bank “to abandon the 9.5bn shillings payment to shareholders,” acknowledged James Mwangi, CEO of Equity Bank.

The bank intends to focus on “conserving liquidity and deploying it to help our clients survive during this economic crisis and recover and prosper after the crisis”.

In the first quarter of 2020, Equity had recorded a 14.4% year-on-year growth in its balance sheet to 693bn shillings, driven by a sharp increase (+24%) in loans to 379bn shillings. But at the end of May, Equity announced the restructuring of 25% of its loans due to the coronavirus, representing a portfolio of 92bn shillings (770m euros).

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On May 12, Moody’s confirmed its B2 equity rating, but downgraded its outlook from stable to negative.

The agency said it was concerned about the level of outstanding loans (7.8% of total gross loans, compared with 6.5% for Kenya Commercial Bank, the country’s leading bank) and the high level of public debt securities held by the bank.

Atlas Mara run of bad luck

For its part, Atlas Mara continued its run of bad luck, with total assets declining by 6.3% to $2.6bn in fiscal year 2019, compared to $2.8bn in 2018 – with loans declining by 44.2% in 2019.

In addition, last year, customer loans decreased by 10.5%, 2.2% and 10.6% respectively in Atlas Mara’s banks in Tanzania, Zambia and Rwanda, three subsidiaries to be acquired by Equity Group. In particular, the group recorded a 35% year-on-year decline in net interest income, the banks’ main source of income.

Launched at the end of 2013, Atlas Mara had strong ambitions on the continent, but has accumulated disappointments: its investments in Union Bank of Nigeria were undermined by the oil crisis and the depreciation of the naira.

UBN’s revenues, expressed in dollars, have halved since 2013 from $353m to $152m. At the same time, the group’s other subsidiaries – via the BancABC holding company – are suffering from excessively high operating costs.

In 2019, Atlas Mara recorded a loss of -$143m, compared to a profit of $40m in 2018. Its revenues declined from $231.4m to $198.8m last year.