An employee of ARM Cement packages cement at the firm's Athi River plant. FILE
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The CDC funds will allow ARM to retire expensive short-term loans that have been weighing down the company’s earnings.
UK-based development financier CDC is set to acquire a 40 per cent stake in ARM Cement after the firm injected $140 million (Sh14.1 billion) into the family-owned Kenyan manufacturer.
The CDC funds will allow ARM to retire expensive short-term loans that have been weighing down the company’s earnings. The CDC is owned by the UK’s Department for International Development (DfID).
The Business Daily has learned that the transaction will leave the family of ARM’s chief executive, Pradeep Paunrana, with a 30 per cent stake while the balance will remain in free float.
“We are proud to back a founder-led frontrunner in East African manufacturing,” Mark Pay, CDC’s managing director for equity investments, said in a statement announcing the deal.
“This investment will strengthen a company making a difference to the local economy, bringing jobs and lower cost raw materials to a region traditionally dependent on imports.”
The transaction is subject to regulatory and shareholder approvals.
ARM’s short term debts jumped 35 per cent to Sh14.4 billion in the nine months to September 2015, raising its finance costs 3.3 times to Sh1.1 billion.
This expense contributed to the firm reporting a net loss of Sh469 million in the same period, reversing the net profit of Sh1.1 billion the year before.
ARM will now channel about $110 million (Sh11.1 billion) of the fresh capital towards settling its expensive debt.
The balance will go towards expanding its operations and scaling up the business’ sustainability status such as reducing energy costs and lowering greenhouse gas and dust emissions.
“We chose CDC as an investor and partner to help us achieve a shared vision of creating the leading and lowest-cost East African cement business,” Mr Paunrana said in a statement.
To free up its balance sheet, ARM initiated a capital-raising drive, seeking funds to pay off the crippling debt. The company in August announced plans to issue a Sh7 billion bond and later raised this amount to Sh10.7 billion.
ARM later ditched this option and instead started the search for a strategic investor who was to inject $125 million (Sh12.6 billion) into the business in the form of a convertible loan in the form of preference shares.
The investor, who was to earn interest at an undisclosed rate, was to get right to convert the preference into ordinary shares in 2023 in exchange for a stake in the region of 25 per cent stake.
ARM has now chosen to go with an equity investor (CDC) from the start, a cheaper alternative that will however see the founder shareholders part with a bigger portion of the company.
“This is a significant milestone in ARM’s journey,” said Mr Paunrana.
CDC’s foray into the country’s cement industry comes at a time when manufactures, buoyed by the booming real estate sector, are producing above the market’s absorption, keeping prices stable.
The East African Portland Cement, Bamburi, Mombasa Cement, Savannah and National Cement are among ARM’s leading competitors in the sector. Two week ago, CDC announced that it was in talks to acquire a 10.7 per cent stake in I&M Holdings.
CDC has in the past also provided capital to Equity Bank, Co-operative Bank, Jamii Bora Bank and Chase Bank either through debt and equity.
The financier, together with Actis, jointly invested $25 million (Sh2.5 billion to fund the construction of Garden City Mall along Thika Road.
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