CMC Holdings showroom on Lusaka Road in Nairobi’s Industrial Area. Photo/FILE
What you need to know:
Documents seen by the Business Daily show that CMC has promised to put a tight lid on costs, including a freeze on the payment of dividends to current shareholders.
CMC has also promised to keep its shares suspended from trading at the Nairobi Securities Exchange (NSE) until the deal is closed.
The Dubai-based firm has also sought assurances that CMC’s current business partners --including motor vehicle franchises and banks — will continue to work with the conglomerate after it takes over.
Dubai-based Al Futaim Group has set tough conditions for its planned buyout of local motor dealer CMC Holdings, aiming to protect its investment in the Kenyan firm from erosion.
Documents seen by the Business Daily show that CMC has promised to put a tight lid on costs, including a freeze on the payment of dividends to current shareholders.
CMC has also promised to keep its shares suspended from trading at the Nairobi Securities Exchange (NSE) until the deal is closed.
The agreement signed by the two companies on September 6 means that CMC shareholders, who have not earned anything from their ownership of the firm in the past two years, will not get financial benefits from their investment save for the ultimate payout from Al Futtaim.
The Dubai-based firm has also sought assurances that CMC’s current business partners --including motor vehicle franchises and banks — will continue to work with the conglomerate after it takes over.
Al Futtaim on September 9 announced its intention to acquire CMC for Sh7.5 billion or Sh13 for each of the company’s 582.7 million ordinary shares.
Through the Standstill Agreement, Al Futtaim sought and obtained a guarantee that it will inherit a viable business with a healthy balance sheet at the close of the deal – forcing CMC to commit to a minimum financial performance in the interim period.
Higher expenses saw CMC’s net profit drop 62 per cent to Sh147.4 million in the six months to March, representing an average monthly net income of Sh24.5 million.
CMC owners have also signed up to ensure that the company’s net asset value does not fall by more than five per cent from the Sh5.8 billion in March.
To further strengthen its balance sheet, CMC has agreed to retire part of its bank loans through asset sales that will fetch a total of Sh312 million.
The motor firm has announced plans to sell two properties in Nairobi worth Sh158 million and two in Kampala valued at Sh154.8 million, with the proceeds going directly to its creditors.
CMC had short-term borrowings of Sh3.1 billion in March and long-term borrowings of Sh268.5 million.
CMC has committed not to review the terms of its executives and senior managers ahead of the buyout.
The motor dealer’s overall payroll costs must not to rise by more than 10 per cent and it cannot dispose of any high-value assets, including its 32.5 per cent stake in assembly firm Kenya Vehicle Manufacturers Ltd.
Al Futtaim also sought and obtained assurances that CMC will retain all motor vehicle brands in its stable such as Ford and Volkswagen post-acquisition.
Al Futtaim, which holds distribution rights for Toyota and Honda in its home market, says it will help CMC expand existing brands in Kenya and the region.
Under the agreement, CMC owners also undertook to protect the company’s value in the interim period and ensure that its profitability does not decline substantially.
The Dubai-based firm expects CMC to maintain a minimum average net profit of Sh15 million per month from April 2013 going forward.
“Each of the parties undertake to the other to act in utmost good faith with respect to the Take-over Offer and with all due expedition to comply with its obligations,” reads part of the agreement.
It further states that there shall not be “any declaration of, making or payment of any dividend, distribution or return of capital,” in the period between the opening of the offer and completion of the acquisition.
CMC last declared a dividend of Sh0.2 per share for the year ended September 2010 when it made a net profit of Sh406.6 million.
The motor dealer made its first net loss of Sh181.1 million the following year, a performance that set in motion a dividend freeze that is set to persist with the new instructions from Al Futtaim.
CMC returned to profitability in the year ended September 2012 when it realised Sh105.3 million in net income, but maintained a zero-dividend policy.
Non-payment of dividends has therefore limited CMC shareholders to the buyout offer of Sh13 per share which represents a four per cent discount compared to the last trading price of Sh13.5 in September 2011.
Al Futtaim’s offer has, however, been seen as highly generous judging from the fact that CMC has lost its flagship Jaguar Land Rover (JLR) franchise that accounted for nearly a quarter of its annual sales.
CMC investors will not have an opportunity to trade their shares ahead of the buyout because the motor dealer’s board has promised not to apply for resumption of trading.
The Capital Markets Authority (CMA) suspended CMC from trading at the Nairobi bourse in the wake of a boardroom war which the regulator feared would spark panic trading on the counter.
The CMA has maintained a policy of suspending shares of publicly traded companies that are the target of acquisitions – meaning that even if the shares had been trading they would have been suspended with the announcement of the takeover deal as happened with AccessKenya following the revelation of an intended sale of the company to South Africa’s Dimension Data for Sh3 billion.
More recently, the suspensions have drawn controversy with a section of stock market investors arguing that the regulator should allow free trading to guide new price discovery in light of the takeover bids.
Potential acquirers have, however, been happy with the freeze in trading fearing a price rally that could force them to pay more for the shares than initially planned.
The share suspensions have also helped the buyers to lock in their offer price, pegging it on a discount or premium on a company’s average share price over a specific period.
Analysts, however, see CMC’s suspension as a blessing that shields investors from the expected sharp drop in the share price on resumption of trading following the loss of the JLR brands.
CMC shareholders controlling at least 75 per cent of the company’s stock have to accept Al Futtaim’s offer for the deal to proceed. Major owners have already declared support for the buyout.
The deal, expected to close early next year, will see the auto dealer delist from the Nairobi bourse as major investors walk away with billions of shillings.
CMC’s top shareholder Peter Muthoka is expected to earn Sh1.8 billion for his 24.7 per cent stake in Kenya’s fifth-largest motor dealer, making him the biggest beneficiary of the buyout.
Business associates Paul Ndung’u and Joel Kibe, who also serves as CMC chairman, will get Sh1.7 billion for their combined 23 per cent stake while former long-serving CMC chairman Jeremiah Kiereini will exit with Sh910.4 million for his 12.5 per cent stake.
