Equity Bank builds Sh20bn war chest for Africa buyouts

Equity Bank chief executive James Mwangi at a
Equity Bank chief executive James Mwangi at a past function in Nairobi. The bank has created 400 million shares with a current market value of Sh20.9 billion, boosting its war chest for acquisition of lenders across the continent. PHOTO | FILE 

Equity Bank has created 400 million shares with a current market value of Sh20.9 billion, boosting its war chest for acquisition of lenders across the continent through share swaps and private placement.

Update: This will be supplemented by Sh36 billion in borrowings and a further Sh160 billion through a rights issue or secondary IPO ahead of plans to expand into ten countries.

The bank will, at a shareholders’ meeting scheduled for Tuesday, seek approval for creation of an extra 411,419,668 shares that it sees as a key plank in its strategy of transforming into a Pan-African lender through rapid expansion across the continent.

Equity shares are currently trading at Sh51 per unit at the Nairobi Securities Exchange (NSE), putting the value of the new stock at Sh20.9 billion -- equivalent to a tenth of the lender’s market capitalisation.

“The board, subject to obtaining all requisite regulatory approvals, be and is hereby authorised to allot and issue the shares created in a series of transactions by way of private placements in share swap arrangements to facilitate acquisition of the subsidiaries,” reads part of the shareholders’ meeting agenda.

The value of Equity Bank’s stock acquisition war chest could, however, differ substantially from the Sh20.9 billion indicative market price, depending on the rate at which it allocates the shares to buyout targets.

Companies ordinarily discount their shares during stock-financed buyouts to sweeten the deal for the firms they intend to acquire.

Attempts to reach Equity Bank chief executive James Mwangi or his personal assistant to comment on the plans were not successful.

The management of the bank, ranked as Kenya’s most profitable, will be asking shareholders to approve acquisition of subsidiaries in Africa “undertaking businesses similar to Equity’s.”

“The board of the company be and is hereby authorised to approve the terms of such acquisitions and enter into agreements in order to undertake such acquisitions,” reads the agenda.

Regional expansion

Equity Bank has previously stated its interest in entering neighbouring countries Ethiopia, the war-ravaged Somalia, and the Democratic Republic of Congo.

The management sees DRC as an attractive economy that can offer opportunity for long-term growth due to its vast mineral wealth and rising population.

Ethiopia may prove to be a difficult market to enter with existing government regulations locking out foreign-owned banks, but the country’s leadership has recently showed signs of loosening up as it seeks to quicken economic growth and create jobs for its more than 90 million citizens.

Last year, Equity Bank head hunted Anthony Kituuka from its rival KCB to be executive director in charge of regional subsidiaries.

The lender currently operates in Uganda, Tanzania, Rwanda and South Sudan. The regional operations contributed Sh1 billion to its bottom line last year, up from Sh245 million a year earlier.

“Kenyans’ tax money has been used to liberate and create peace in that country (Somalia). We should now seek a peace dividend and this can only be achieved by investing in the market,” Mr Mwangi said at an investor briefing two years ago.

Equity also appears to be looking beyond its shareholders and cash reserves in the bid to finance its pan-African bank strategy.

A recent report by the International Finance Corporation (IFC) cites an un-named East African bank that is seeking Sh7.2 billion ($80 million) “growth capital.”

IFC, the World Bank’s private sector lending arm, reveals that the un-named corporation seeking funding is a listed bank owned by pension funds, development institutions, financial institutions, private investors and individuals—which fits the description of Equity Bank’s shareholding mix.

“IFC will play a critical role in providing required growth capital in a bank with a significant retail shareholder base that may not be able to fully participate in a capital raising exercise” reads part of the IFC report dubbed Kifaru.

Attempts to confirm the name of the bank with IFC were also unsuccessful.

The upturn in performance by Equity Bank’s regional subsidiaries in 2014 followed recovery of its South Sudan operations and capital injections in Tanzania and Rwanda, which was in the red.

Equity also operates an investment bank, insurance agency and Finserve, its telecommunication business unit.

The bank has mainly preferred to enter new markets by setting up new operations, with the exemption of Uganda which it entered through an acquisition.

The buyout of Uganda Microfinance Limited did not go down well with the lender initially as it struggled with inherited, non-performing loans.

The planned acquisition through share swaps and private placement traces a similar path followed by Kenyan advertising and media relations company, Scangroup.

In 2008, Scangroup Limited invited global communications firm WPP to its roll of shareholders by allocation of new shares that were created to accommodate the international company.

Scangroup has since creation of the shares been on an acquisition spree across Africa, announcing deals in Nigeria, Ghana, Tanzania and South Africa.

Kenyan lenders have been expanding to less competitive regional markets to sustain their growth numbers. The banks are also protecting their profitable East African turf from the bigger Nigerian and South African banks that have been spreading their wings closer home.

Other Kenyan banks with a cross-border presence include KCB, which has the largest regional footprint with a presence in Burundi where Equity is absent. KCB has also declared intentions of entering Somalia.

Mid-tier lender, DTB, has announced plans to enter the Democratic Republic of Congo by end of the year but is yet to declare whether it will start new operations or make an acquisition. It is also eyeing Madagascar and Rwanda. DTB operates in Tanzania, Uganda and Burundi.

Co-operative Bank, which is banking on a strategy of partnering with Saccos to penetrate new markets.

It is hoping to crack the Ethiopian market by inviting the State as a joint-venture partner. Co-op used the joint-venture strategy to enter South Sudan.

Equity Bank had 27,825 shareholders as at the end of last year, who include private equity firm Helios which acquired a 24.4 per cent stake in the lender in 2007 before selling half of its stake to Norway based Norfund last year.

Other major shareholders of the bank include financial services company Britam investments holding 7.1 per cent, the CEO, Mr Mwangi, with 4.88 per cent ownership and Andrew Mwangi with a 2.44 per cent stake.

Equity last year invested Sh800 million in a software system upgrade. Its capital expenditure is also expected to rise as it launches its telecommunications business, Equitel.

Last year the lender sold its stake in Housing Finance to Britam for Sh2.8 billion, boosting its cash reserves. It reported after tax profit of Sh17 billion last year.