Nakumatt takes Sh500m loan ahead of share sale

Retail chain Nakumatt Holdings has raised Sh500 million through a short- term loan in a deal expected to pave the way for entry of a deep-pocketed strategic investor into the business.

The transaction was disclosed by investment advisory firm Dry Associates, which arranged the private placement last quarter.

The firm said Nakumatt went to the market seeking Sh500 million through an insured loan and got all it wanted, signalling investors’ confidence in its ability to repay the debt.

The new loan comes ahead of Nakumatt’s plan to raise billions of shillings from the sale of a 25 per cent stake to an undisclosed investor.

The retailer made the move after a sharp rise in debt that has constrained its cash flows, leading to delays in paying suppliers. Part of the new capital is set to retire some of the outstanding debt that has earned the retailer a credit rating downgrade.

South Africa’s Global Credit Ratings (GCR) recently assigned Nakumatt a long-term rating of BB- down from BB, indicating a weakened ability to meet outstanding financial obligations.

“The rating downgrade reflects the notable deterioration in Nakumatt’s credit risk profile. Growth of the business has been highly leveraged, with the ever-growing working capital and capex requirements having been largely funded through short­-term debt,” said GCR in the credit report.

The rating agency noted that Nakumatt’s debt burden had quadrupled in the last four years to Sh18 billion up from Sh4.7 billion in 2012 “placing unduly high pressure on the group’s gearing and liquidity position, with funding limits having largely been reached.”

The GCR disclosed it did not factor in plans by the regional retailer to sell a minority stake to new investors during the rating process as such previous plans had fallen flat.

READ: Nakumatt seeks deep pocketed investor to buy 25 per cent stake

Nakumatt’s operations are symptomatic of the pressure facing Kenya’s formal retailers in general, with several of the supermarkets delaying payments to suppliers amid a debt-fuelled and capital-intensive race to expand locally and in the region.

Nakumatt, Tuskys and Naivas jointly owed suppliers Sh8 billion in unpaid dues in September last year. Some of the payments date back to early 2014.

The tough operating environment has pushed several supermarkets into losses including Uchumi and Ukwala, which was acquired by Botswana’s Choppies.

Nakumatt’s gross sales grew by nearly a tenth to Sh51.6 billion in the year ended February 2015 compared to Sh48 billion a year earlier.

Surging finance costs, however, ate into the supermarket’s earnings-- with gross profit plunging to Sh305 million in the review period.

Competition has also increased with the entry and expansion of foreign retailers such as French chain Carrefour and South Africa’s Massmart Holdings-- which trades locally under the Game brand.

Businessman John Harun Mwau recently sold his 7.7 per cent stake in Nakumatt ahead of the dilutive entry of the new investor in the company.

It is not clear how much Nakumatt could raise from the new investor, but the amount could top the Sh10 billion mark if the retailer has maintained or grown its value from three years ago when its CEO Atul Shah said it was worth about Sh40.8 billion.

READ: Mwau exits Nakumatt with sale of 7.7pc stake

A sale agreement was expected to have been signed by the end of this month. If successful, the deal could still take months to complete as approval from the relevant regulators is sought.

With 42 outlets in Kenya, the retailer is majority-owned by the Shah family (92.3 per cent) and the rest of the equity is held by the unnamed investor who bought out Mr Mwau.

Ratings agency GCR in an earlier report said that the equity deal would see substantial capital injected into the business, a feat that would markedly ease funding pressure and facilitate the planned rollout of new branches.

Nakumatt’s plan to sell a large stake to a strategic investor was first mooted in 2009 when a consortium of investors led by London-based private equity fund Satya Capital —associated with Sudanese billionaire Mo Ibrahim— expressed interest in the retail chain, but the deal fell through.

The firm’s decision to tie up with a strategic investor means it has abandoned earlier plans to raise capital through an initial public offering at the Nairobi Securities Exchange.