Billionaire investor Chris Kirubi has bought 2.1 million shares of loss-making Kenya Airways, joining a group of investors who have been buying the stock as the company struggles to stay afloat.
Mr Kirubi bought the shares in early August shortly after the airline announced that it made a record-setting net loss of Sh25.7 billion that also left it in a negative capital position of Sh5.9 billion.
The investment, revealed in August regulatory filings, has raised questions whether the flamboyant businessman is merely speculating on the share or is privy to a turnaround strategy that will ultimately pay off in the coming years.
Mr Kirubi, whose net worth is in excess of Sh12 billion, said the share purchase is simply a demonstration of his patriotism.
“There are no returns. I am just showing my support for Kenya Airways,” he said, imploring more Kenyans to buy the stock to prevent it from crashing.
“I will buy more shares [in KQ] when I have money to invest,” Mr Kirubi said, adding that KQ, as the airline is popularly known, is a systemically important firm that should be saved and failure to do so would leave the country “marooned.”
The businessman’s actions and statements on KQ have contrasted in the recent past, leaving observers to guess which position he truly holds.
At KQ’s July 30 investor briefing, Mr Kirubi declared that the airline was all but dead.
He observed that the combination of losses and more borrowing was sure to kill the company, adding that the airline has never been an investable business.
But Mr Kirubi has also said he believes the airline can be turned around, allowing shareholders and other parties including tourism industry players, exporters and importers to continue benefiting from its operations.
If the billionaire is the kind of investor who puts his money where his mouth is, the share purchase shows he believes in the more optimistic view.
But it may well be that Mr Kirubi is ready to lose his investment in KQ to show proof of his patriotism since Sh11.55 million – the current market value of his 2.1 million shares – is a drop in the ocean considering his fortune.
Whatever his motivation, Mr Kirubi’s investment has helped to artificially prop up the stock that is essentially worthless in light of the fact that the airline’s liabilities have exceeded its assets.
KQ’s debt-financed fleet modernisation programme pushed its total liabilities to Sh187.9 billion in the year ended March, overtaking its assets that stood at Sh182 billion in the same period.
Despite the wipeout of shareholder wealth, the stock has only declined 17.9 per cent since the massive loss was announced to trade at Sh5.5 on Friday.
Local individuals, including Mr Kirubi, have been the net buyers of KQ’s shares, raising their combined holdings by 2.2 percentage points to 17.7 per cent in the three months to August.
The government, with a 29.7 per cent stake in the airline, is playing a major role in its turnaround plan, which shareholders are betting on to salvage their investment.
If investors can glean KQ’s rescue plan, few are better placed than Mr Kirubi who has emerged as an insider in the current government.
The Treasury recently lent the airline Sh4.2 billion, with African Export Import (Afrexim) Bank also providing Sh20 billion in the form of a short-term loan to fund KQ’s working capital.
Dutch airline KLM, which is the largest shareholder with a 26.73 per cent equity, also provided funding but the national carrier did not disclose the amount.
The government is contemplating bailing out the airline to the tune of Sh60 billion, with the final amount expected to emerge from a capital restructuring study by consultancy firms Mckinsey and Seabury.
The turnaround plan could include equity financing in the form of a rights issue or a private placement.
As part of its short-term survival, the airline intends to sell assets – including aircraft and land holdings – this financial year, booking an estimated net gain of $100 million (Sh10.5 billion) from the disposals.
Analysts at Standard Investment Bank (SIB) have said that KQ needs a bailout of up to Sh100 billion to remain viable, noting that the priority should be reducing its debt burden.
KQ may also need to significantly scale down its operations and cut on operating costs to return to profitability, SIB added.
The anticipated new round of equity financing is likely to see the government’s ownership in KQ go above 50 per cent from the current level, significantly diluting other shareholders’ stake.
This, analysts said, is based on the expectation that retail investors would avoid pumping new money into the airline having booked major capital losses besides missing out on dividends in recent years.
Should the Treasury decide to bail out the airline, it could be forced to make major revisions of other expenditure items or borrow more since rescuing the airline was not provided for in the current budget.
The anticipated bailout is expected to strain government finances, with striking teachers demanding a pay hike that would require an extra Sh67.2 billion spread over the four years ending June 2017.
The extent to which the Treasury participates in saving KQ will determine whether the airline will be nationalised or retain its status as a listed firm with a significant number of retail investors.
The company had 74,385 Kenyan investors as of August, with 3,123 local institutions also holding the stock in the same month.
Shareholders are waiting to take the cue from Treasury’s action on the airline, which will determine the ultimate fate of their investment.
KQ had expected the aggressive acquisition of new aircraft, including Dreamliners, to grow its route network from its Nairobi hub and ultimately grow revenues to pay off the debt and leave it with a profit.
The strategy has, however, met stiff competition from the Middle East carriers besides Kenya’s depressed tourism industry on which KQ has relied for inbound passengers.