Total gets Sh7.5bn loan to buy Chevron’s Kenya assets

Oil marketer, Total, has turned to local banks for money to conclude the buyout of American rival Chevron’s assets in Kenya, it has emerged.

The French multi-national, through its Kenyan subsidiary, has signed a Sh7.5 billion loan agreement with local lenders pulling through the first such mega loan in Kenya since the onset of the global financial crisis late last year.

Managing director Felix Majekodunmi said a consortium of six local banks had signed up to offer a Sh4.7 billion syndicated five-year loan to the oil marketer and that an additional Sh2.8 billion would be raised through “short term facilities.”

He did not identify the banks, citing confidentiality agreements.

The loans deal, signed on Friday, puts Chevron Kenya’s purchase price at Sh11.4 billion, which Total is partly financing through the creation of new preference shares valued at Sh3.9 billion.

The firm last week announced that it was issuing 123 million new redeemable preference shares to the parent company, Total Group, in exchange for Sh3.9 billion to buy Chevron assets.

Citibank, Standard Chartered, KCB, Barclays, Stanbic and Bank of Africa are listed as the company’s lenders in Total’s financial statements, but people familiar with the deal said other banks may have been involved in the deals.

The conclusion of the transaction — billed as Kenya oil industry’s biggest ever – should leave Total Kenya with the task of generating profit for shareholders as it manages the huge financing costs that comes with the new debt.

Mr Majekodunmi said the acquisition gives Total Kenya control of slightly over a quarter of Kenya’s petroleum market, adding that “the projected increase in sales volumes will be critical for the survival of the company.”

Analysts at Renaissance Capital and African Alliance investment banks however said Total Kenya shareholders should brace for tough times ahead, arguing that soaring financing costs will almost certainly cut the Sh2.50 dividend payout that they have enjoyed over the past five years.

The combined Total Kenya pro-forma balance sheet post the acquisition shows the firm will carry short term bank borrowings of Sh9.75 billion, and a further Sh1.2 billion payable to its parent company and tax authorities.

Net finance charges and other operating expenses, as per the simulated combined income statement for last year will double to about Sh681 million and Sh3.5 billion respectively. Interest payments on the loans will be pegged on the prevailing three-month Treasury Bill interest rate “plus a premium”.

The income statement shows Chevron, which operated locally under the Caltex Kenya brand, made an after-tax loss of Sh366 million in 2008 a boom year for local oil marketers driven by a steep rise in international crude oil prices.

Caltex is a private company and was therefore not obliged to make public its performance. Total Kenya made an after tax profit of Sh704 million in the period while its listed competitor, KenolKobil, announced a Sh1.2 billion profit in the same period.

“The additional financing costs are huge and are likely eat into dividends payable to shareholders,” said Eric Musau, a research analyst at Renaissance Capital.

Mr Musau said the new debt burden will increase Total Kenya’s business risk, which would only be manageable if the oil marketer generates enough revenues to cover additional operating and financing costs.

“The firm however has the advantage of the parent company’s backing, as demonstrated by its uptake of new equity signalling that it is here for the long haul,” said Mr Musau.

Half year accounts show Total Kenya closed last year in a negative cash flow position of Sh4.7 billion, putting into doubt its ability to generate sufficient cash to pay out dividends to an increased pool of shareholders.

Contrary to ordinary preference shares that generally attract a constant dividend payout that is not pegged on a company’s annual performance, the new preference shareholder will get dividends from the same pool of after tax earnings as ordinary shareholders.

The new preference shares make about 70 per cent of the oil marketer’s 175 million issued shares. African Alliance analysts said it could take up to five years (after the Sh7.5 billion loan is repaid) for Total Kenya shareholders to start earning dividends similar to the current pay out.

Local oil dealers have to contend with high operating costs partly due to inefficiencies of the Kenya Petroleum Refinery where they are required to process half of their oil imports.

The Kenya Pipeline Company, another state corporation that is charged with pumping oil upstream from the Mombasa Port has also been suffering efficiency and capacity constraints, forcing oil marketers to rely on the more expensive alternative of road transportation to supply inland markets.

A requirement by the Kenya Revenue Authority for upfront payment of taxes on oil imports and delays in VAT refunds has further added to the oil marketers’ working capital requirements.

The African Alliance researchers said Total Kenya could ultimately benefit from the transaction depending on how efficiently the new combined entity is run.

“The strategy by local marketers is to grow profits by increasing volumes, it is quite a challenge to increase profit margins due to the tough competition,” said the African Alliance analysts.

Mr Majekodunmi said Chevron’s outlets had performed “above expectations” in the last four months, while Total Kenya had turned around from the dip in its half-year performance.

“The improved performance will be reflected in the third quarter results which we will be announcing shortly,” said Mr Majekodunmi, who however added that Chevron’s performance will only be integrated into the group after a final shareholders’ approval of the transaction expected on October 19.

Total Kenya is also expected to cede at least 21 retail petrol stations and other assets that previously belonged to Chevron Kenya to a buyer of its choice within the next 14 months to get the commissioner of monopolies full approval for the transaction.

The targeted assets were chosen on the basis of location while the commissioner also considered whether possession of other facilities such as lubrication plants would make Total an unduly dominant player in the respective niches’.

It was earlier thought that the government would force Total to cede the assets to the state backed marketer the National Oil Corporation (NOCK), but Mr Majekodunmi said the property would be sold to any willing buyers.

Nock, which came second in the bid for Chevron Kenya assets last year, is however negotiating to buy about 12 petrol stations.

Total Kenya beat Kenyan rivals to the Chevron buyout bid after the American oil company decided to exit the African Market in what it termed as a strategic re-organisation of its operations.

Some of the other assets that Total will have to part with include a liquefied petroleum gas filling station in Nairobi, a bulk storage facility in Kisumu, aviation and lubrication plants and terminal facilities in Mombasa.

Total Outre Mer, a subsidiary of the French based Total Group, controls over three quarters of Total Kenya’s total voting rights. About 6,000 minority shareholders own 36 million shares in the firm.