Why Merali is moving the pillars of his business empire

Billionaire investor Naushad Merali has stepped up the sale of key segments of his vast business empire, leaving market watchers guessing his next move in Kenya’s fast-changing investment scene. Mr Merali’s moves came under the spotlight last week after it emerged he was preparing to sell 51 per cent of Equatorial Commercial Bank (ECB) to Mwalimu Sacco for Sh2.5 billion.

The intended sale of ECB is the latest in a string of Mr Merali’s divestitures from businesses with relatively weak financial performance, setting a trend that the market is beginning to notice.

READ: Mwalimu Sacco’s bid to buy Merali bank stopped

Two months ago, Sameer Africa, a public listed company that is 72.15 per cent owned by Mr Merali, announced plans to spin off its tyre business. The businessman is preparing to cede 50 per cent of the company’s tyre division for Sh1 billion to a strategic partner from Asia.

Mr Merali has in the recent past divested from ICT firms Swift Global, Kenya Data Networks (KDN), and Airtel Kenya – raking in billions of shillings in the process.

“He was a pioneer in most of these sectors, but competition has increased with new entrants forcing him to rethink his investment outlook,” said a senior manager in one of the Merali firms, adding that expression of interest by prospective buyers has given him a chance to exit.

At Sameer, for instance, the proposed deal would significantly reduce Mr Merali’s exposure in the highly competitive tyre business even as he retains interest that could benefit from any future improvement.

Sameer has recently found it difficult to compete in a market that is awash with cheaper imports from Asia, which now account for an estimated 50 per cent of the market. Before the current onslaught, Sameer brands Yana and Bridgestone tyres had for decades dominated Kenya’s tyre market but are now facing intense competition from Chinese, Taiwanese and Indian brands.

Like other Kenyan manufacturers, Sameer’s operating costs remain significantly higher than those of its Asian rivals who enjoy much lower energy and labour costs. The new partner is expected to help Sameer grow and defend its market share through the supply of cheaper, imported tyre brands backed by use of modern technology to locally produce well-priced products. 

READ: Sameer partners with VLCC in beauty, fitness venture

It is not lost to market watchers that Mr Merali has kept Sameer’s lucrative real estate arm out of the proposed buyout deal, underlining his strategy of turning around or selling off his struggling ventures.

Sameer, the Nairobi Securities Exchange-listed firm, fully owns Sameer Industrial Park and Sameer Export Processing Zone. It also has a 25 per cent stake in Sameer Business Park, a complex of commercial office blocks that are mainly occupied by banks and other high-end retailers.

Sameer’s net profit in 2013 more than doubled to Sh401.1 million, helped by a Sh255 million gain on sale of a two-acre piece of land along Nairobi’s Mombasa Road. The company’s operating profit before tax, reflecting the performance of the mainstay tyre business, was flat at Sh1 billion.

READ: Sameer predicts profit dip after land sale gain

Mr Merali has also crafted a similar strategy at ECB where he plans to cede majority stake to Mwalimu while retaining a minority interest that could reap from any gains arising from the Sacco’s turnaround plan.

ECB is ranked 27th out of Kenya’s 44 banks, with 12,000 deposit accounts and about 6,000 loan accounts for a cumulative market share of 0.73 per cent. The bank has not paid shareholders any dividends in the past decade and has twice posted losses in the past six years – bucking the super profitability of Kenya’s banking sector.

ECB made a Sh68.1 million loss in 2010, which deepened to a record Sh481.9 million in 2012 before bouncing back to post a net profit of Sh55.6 million last year.

Until the regulators stopped the deal last week, Mwalimu, which has Sh24.5 billion in assets and 57,277 members drawn largely from high school teachers, was expected to help ECB’s performance and raise its profile in the long term.

The planned divestitures add on to the major sell-offs Mr Merali made in the ICT sector last year in what has been linked to cutthroat competition from new entrants in the telecoms business.

Mr Merali has ceded his entire 49 per cent stake in Internet service provider Swift Global and 19.2 per cent equity in fibre infrastructure firm KDN to Mauritius-based Liquid Telecom. He retains a minority interest in KDN estimated at about 20 per cent. The businessman was a founder investor in the two firms more than 10 years ago, positioning them among Kenya’s pioneer providers of telecommunication services.

But as the field became more crowded with the entry of new players such as Jamii Telecom, Safaricom, AccessKenya, MTN and Wananchi, the Merali firms’ market share diminished forcing some into loss-making territory.

It has not been lost to keen observers of Mr Merali’s vast business empire that he has chosen to be more patient at Eveready East Africa, a struggling battery maker, even as he seeks to cut his stake in Sameer and ECB. The businessman is the single largest shareholder in Eveready with a 35 per cent stake held through his investment vehicle East Africa Batteries Limited.

READ: Eveready hits fresh high on factory closure

Eveready, which manufactured dry cell batteries for decades at its Nakuru plant, last week announced that it was shutting down the factory in favour of imports from Egypt after an onslaught by low-cost rivals made local production unsustainable. Eveready, which is listed at the NSE, has also announced plans to enter the booming property market as part of its turnaround measures.

Eveready claims that price undercutting by illegal battery importers has inexorably squeezed its earnings, forcing it to retrench 99 employees who worked at the Nakuru factory that closed last week.

The company made a net profit of Sh45 million in the year ended September last year, about 17 per cent of the Sh269 million it made in 2005.