Total plans rights issue to offload shares

Total Outre Mer, the parent company for NSE listed oil marketer, Total Kenya, has said it will redeem preferential shares worth Sh5.2 billion that were recently issued to it by the local subsidiary through a rights issue or repurchase from retained profits.

The parent company is injecting additional capital into its local outfit by taking up 331 million redeemable preference shares at Sh15.71 each.

The amount raised will be used to settle some bank loans taken by Total Kenya, whose interest expenses wiped out its operating income pushing it into losses.

“Under the Companies Act, redeemable preference shares can only be redeemed out of the profits of the company which would otherwise be available for dividend or out of the proceeds of fresh issue of shares made for the purpose of redemption,” said the company’s board in a statement.

Preference shares is class of ownership in a company which gives the holder a priority on dividends and a higher claim on assets in case of liquidation, but do not usually confer voting rights.

Conversion of the bank loans held by Total to shares will result in the company growing its capital base by more than double from Sh4.8 billion to Sh10 billion.

The shares will not be listed at the Nairobi Securities Exchange and will not have voting rights, but will attract dividends.

The resulting capital restructuring will see the parent company taking home more than 95 per cent of the company dividend payout.
A decision to redeem the shares using profits will mean a restriction in the dividend payout, while the option of a rights issue will call for the participation of the other shareholders.

Analysts said that the company could prefer to float a rights issue due to previous low profits that could make it difficult to redeem the debt using retained earnings.

“Given the low profitability experienced by Total Kenya of late, we think the likely option to redeem the preference shares is likely to be through a rights issue,” said Standard Investment Bank.

Last year the company did not declare dividends having paid Sh1.05 in 2010. In 2011 Total Kenya recorded a loss of Sh71.4 million down from a profit of Sh916.2 million an year earlier. The company’s performance has been bogged down by financing costs related to expensive loan facilities accompanied by interest rate fluctuations.

Total’s short term borrowings were worth more than Sh10.7 billion by the end of March, down from Sh11.7 billion-- most of which are in the form of unsecured loans obtained from commercial banks used in the making deposits for deliveries.

“It is expected that the issue of the new redeemable preference shares will reduce the current short-term loans and overdrafts and subsequently the finance costs that have negatively impacted on the operating results generated by the company,” said Total Kenya in the statement.

The parent company has issued an early disclaimer that in case Total Kenya opts to conduct a rights issue and Total Outre Mer’s stake it will apply for an exemption from the Capital Markets Authority’s take-over regulations.

Total Outre Mer currently owns 87.27 per cent of Total Kenya, with 41.36 per cent or 123 million shares being redeemable preference shares.

The preference shares each valued at Sh31.58 each were in exchange of a Sh3.9 billion investment in 2010 in the Kenyan business to acquire assets owned by Chevron, then operating as Caltex Kenya, when the American firm was exiting the African continent.

The transaction guaranteed the parent company a dividend even when the oil marketer failed to return a profit.

gngigi@ke.nationmedia.com