Citadel Managing Director Karim Sadek. Photo/WILLIAM OERI
A boardroom deal struck with the help of the World Bank has left Rift Valley Railways, the company that runs the Kenya-Uganda railway, in the hands of three shareholders and an Egyptian private equity firm, Citadel Capital as majority shareholder.
A joint statement from key protagonists in the ownership battle that has dogged Rift Valley Railways (RVR) since late last year -- Citadel Capital and TransCentury – said a new shareholder structure was being negotiated and is expected to be concluded by mid April.
It will leave Citadel with a 51 per cent shareholding, TransCentury with 34 per cent and a Ugandan investor with a 15 per cent stake.
The fate of five other RVR shareholders Mirambo Holdings (15 per cent), Prime Fuels (15 per cent) and Australia’s Babcock and Brown (10 per cent) and Centum (5 per cent) in RVR was not immediately clear.
People familiar with the deal however said Citadel bought out the five for a total of 80 per cent shareholding and is set to cede a 14 per cent stake to TransCentury and another 15 per cent to a Ugandan investor by sitting out an upcoming $10 million (about Sh750 million) rights issue slated for later this month.
This means Cidatel will assume the position of anchor shareholder in RVR further diminishing TransCentury role in the turnaround of the struggling rail firm.
RVR is currently owned by Sheltam with a 35 per cent stake, TranCentury with a 20 per cent stake and the other partners collectively holding a 45 per cent stake.
The battle for control of the firm has however been tilting in favour of Citadel Capital, the Egyptian firm that entered the scene with the acquisition of a 49 per cent stake in Sheltam, the lead investor in RVR.
Citadel and TransCentury have been battling for control of the rail firm since November last year delaying implementation of the turnaround plan for the railway.
TransCentury, which has a 20 per cent stake in RVR, and with the support of Helios Capital has offered to inject $50 million (Sh3.7 billion) of investment capital into the railway operator on condition that it assumes the lead shareholder role, while Citadel has promised to inject $180 million to turn it around through purchase of new locomotives and rehabilitation of the track.
Last December, Transcentury was outwitted by the Egyptians who were gunning for full takeover of Sheltam’s shares.
Private equity firms have traditionally preferred control of firms they invest in especially where they are required to inject substantive capital as is the case in RVR.
Chances of TransCentury and Citadel striking a compromise in the ownership row have previously appeared slim making yesterday’s announcement a sweet surprise.
Details on the exact sharing formulae used to get the five shareholders out of the scene remained scanty but sources said Citadel is expected to sit out of the capital call leaving the entire stake to TransCentury and the Ugandans to boost their stakes.
Trans Century could still boost its stake through a planned $10 million (about Sh750 million) rights issue later this month.
RVR shareholders completed a $10 million cash call on February 6 that raised $6.5 million with the balance being offset by share holder loans.
Only Babcock and Brown stayed out of the offer but the money raised mostly went towards paying overdue concession fees.
The second tranche of cash, due by the end of March, will partly be used to invest in track renovation work and new engines.
The $20 million is part of the $50 million the company needs to raise in a restructuring process to get trains moving.
On Tuesday, TransCentury and Citadel said they had agreed to restructure the ailing rail operations under a $250 million (about Sh20 billion) capital expenditure to jointly upgrade both the rail track, wagons, and train engines.
This represents $100 million (about Sh7.5 billion) over the $150 million plans in Kenya Uganda Railways in the next five years announced by Citadel Capital soon after acquiring a17.5 per cent indirect stake in RVRI, last November.
Apart from capital injection to the business, the two private equity funds said they will jointly strengthen the company’s management and provide the required technical expertise as well as participate in the development of a safer, modern rail track.
The International Finance Corporation (IFC), the private sector arm of the World Bank, which advised the Uganda and Kenyan governments on the concessioning of the railway expressed willingness to work with the new shareholders to revamp the firm.
“IFC welcomes the agreement between Citadel Capital and TransCentury, which will bring an additional injection of capital to the Kenya-Uganda Railway. IFC’s commitment to the Kenya-Uganda Railway has been unwavering throughout the process of transfer to private management,” said a statement by IFC’s communications representative in Nairobi, Mr Houtan Bassiri.
IFC has also been seeking to salvage the concession as it seeks to recover up to $10 million (Sh750 million) already disbursed to RVR.
Still, IFC, which is the World Bank’s private sector lending arm has been trying to play neutral after the two governments appeared to take sides in breaking the impasse with Kenya’s Treasury and Transport ministry officials siding with the highly influential Tran Century Group, while their Ugandan counterparts opted for the Egyptian wealthy investment club.
In a recent statement, Trans Century risked losing an estimated $ 9 million it spent both on acquiring the 20 per cent stake in the company and shareholder loans it has extended to RVR in the last two years. Kenya’s Treasury has previously argued that the April 2006 Interface agreements with the government, Sheltam as the lead investor was required to hold on the shareholding of the RVR throughout the concession term.
On the contrary, the agreement does not say Sheltam’s hands were tied into holding the shares for the whole tenure of the 25-year concession.
Also Uganda’s Privatisation Unit said all the shareholders of RVR were obliged to do was to inform the government that a new firm had come on board.
“The shareholders of Sheltam were under no legal obligation to consult us on, who to sell shares to”, Jim Mugunga, of Uganda’s Privatization Unit, recently said.
On December 17, last year, Citadel announced victory in the race to buy out the majority shareholding in the RVRI, and said it had figured out what to do with the deal and would invest $150 million to turn around the railway over the remaining five years.
At the same time Mr Babatunde Soyoye, the managing partner of Helios, had written to the two governments and everyone involved that they were willing to invest $50 million in a combination of a loan and warrants.
Helios claimed to have convinced the IFC and KfW to release $54 million in funds that the two institutions did not want to release to Mr Puffet’s management.
They were to work with America Latina Logistica, a Brazilian railway operator with $1 billion in revenues.
This offer even included a promise to pay the governments a guaranteed insurance of Sh1.5 billion if they failed to meet targets.
Transcentury had been negotiating with Mr Puffet since October, and he was asking for Sh750 million ($10 million) for his 35 per cent shareholding.
Logistics corridor
The battle between the PEs is informed by forecast outsized returns from the railway in an East African market that is expected to rev up the movement of bulk cargo across the region.
The funds are also keen on a firm hold of the region’s logistic corridor to support their planned investments in Uganda, Southern Sudan and Kenya.
On Tuesday, Citadel said that it had signed a right-of-the-way agreement with the Sudanese Railway Corporation, in yet another deal that marked Nile Valley Railways entry into the promising Sudanese market.
“The Sudanese agreement is the latest development to arise from Citadel Capital’s focus on rail investments in Africa.
Citadel Capital which controls investments in 15 industries spanning 14 countries is among the leading Arab investors in Sudan, where it will operate more than $900 million worth of investments by the end of 2010.
Consultancy firm Deloitte, which handles the firm’s financial records, notes that nothing short of a swift turn around of the firms operations, investment in the rail infrastructure and capital injection by the shareholders will rescue it from collapse.
The battle for control of the rail firm comes as its performance continues to deteriorate on reduced customer numbers.
In 2009, RVR closed the year with a loss of $17.5 million on revenues of $56.1 million, driven by stagnant revenues on reduced customer numbers.
Businesses are frustrated that while rail transport is cheaper than road, most cargo is being hauled on road denying them the edge in a regional market that is becoming increasingly competitive.
But with a revamp of RVR coupled with expected surge in traffic the troubled rail firm could reverse its fortunes.
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