Tanzanian airline Precision Air, which is partly owned by national carrier Kenya Airways (KQ), is set to get between Sh340 million and Sh510 million ($4 million to $6 million) capital injection from the World Bank’s private lending arm, IFC.
In an investment disclosure note, IFC says that Precision Air, which is listed on the Dar-es-Salaam Stock Exchange, will get the money to finance a Sh3.68 billion ($43.2 million) fleet expansion drive that will see it fly to 10 new destinations in the next five years.
“IFC’s role in the proposed transaction is (to) provide scarce long-term mezzanine capital, demonstration effect, environmental and social management and leverage IFC’s expertise in the industry, market and sector expertise and lessons learned from other transactions in the region and beyond,” says the IFC.
Prior to listing at the Dar exchange through an initial public offering (IPO), Precision Air was 51 per cent owned by Michael Shirima, chairman and founder of the airline and 49 per cent by KQ.
Mr Shirima and KQ’s stake declined to 42.91 per cent and 41.23 per cent, while the new share subscribers own the remaining 15.86 per cent.
KQ has set out on a similar growth plan financed through a mixture of equity, debt and internally generated cash. The airline recently floated a rights issue that raised Sh14.5 billion.
It is also planning fleet and route expansion with debt and internally generated revenues to supplement the funds for expansion.
The loan proposal is similar to the KQ rights issue where the IFC approved an additional Sh6.6 billion ($80 million) in debt to fund the national carrier’s expansion plans in addition to taking up $25 million (about Sh2.068 billion) worth of shares.
The disclosure note says that within the next four years as the plan pans out, it will increase the airline’s top line.
“The company expects to double its revenues by 2016, achieving it through a growing fleet and in particular, the new ATRs 600 series that are expected to join the fleet starting this year,” it says.
An IPO fact sheet by NIC Securities shows that the airline had a fleet of 11 aircraft and operated in 14 routes as at September 2011.
The fact sheet states that plans are underway to increase operations to Zambia, Mozambique and the DRC.
KQ said that it could not comment on the deal since Precision Air is an independent company despite its strategic stake in the listed Tanzanian carrier. “We cannot comment on the Precision Air,” KQ communications manager Chris Karanja told the Business Daily.
Precision Air delivered Sh238 million in share of associate income to KQ’s end of year revenues and Sh251 million in gains on deemed disposal after IPO.
KQ posted a Sh95 billion in revenues for the year ended March 31st 2012 and Sh1.66 billion in net profits from Sh3.58 billion in 2011, a 53 per cent drop and to cut costs the airline has said that it has stopped flights to Muscat and Rome.
Precision Air has a share capital of 193 million shares and the last trading price was Tanzanian shillings 475 (Sh40.50) which gives it a Sh5 billion market capitalisation.
Should the IFC loan be approved it will create 600 new jobs in Tanzania from the current 771 most of which will be technical.
The IFC says that its involvement is based on the realisation that it is becoming harder for airlines to get funding, be it through equity or debt as the global economy struggles lending to certain sectors such as the airline industry is becoming conservative.
“Following the financial crisis, financial institutions are reluctant to increase their exposures to the airline sector in Africa.’’
Eric Musau, a research analyst at Standard Investment Bank, said while IFC loans are long-term, they are based on business decisions which means that they have seen a business opportunity worth investing in.