Capital Markets

Equity’s buyout of collapsed broker causes a stir at NSE


Some of the small investors who had put their money in the collapsed Francis Thuo stockbrokers demand redress at the Nairobi Stock Exchange in 2009. Photo/File

Equity Bank’s acquisition of stockbroker Francis Thuo & Partners was concluded amidst stiff resistance by other market intermediaries fearing domination and loss of business from the lender, it has emerged.

Equity, which is Kenya’s largest lender by the number of customer accounts, has been negotiating the acquisition in the past few weeks amid stiff resistance from other brokers with an interest in the bank’s stock market portfolio.

People familiar with the transaction said Equity Investment Bank, a subsidiary of Equity Bank, had acquired Francis at a price of Sh150 million.

Commercial Bank of Africa (CBA) Capital is said to have paid a similar amount for a seat at the Nairobi bourse.

At Sh150 million, Equity’s entry to the Nairobi Securities Exchange (NSE) is Sh100 million less than the Sh250 million what Rennaissance Capital paid for a seat at the bourse at the peak of a bull run in 2007. 

Francis Thuo is the broker that collapsed under the weight of illiquidity in 2006 and has recently fought protracted legal battles with the NSE to retain the seat it has now sold to Equity Bank.

(READ: Defunct Francis Thuo wins battle for stake in NSE)

Equity Bank chief executive James Mwangi did not answer calls or reply to e-mail messages on the sale.

Equity’s interest in a brokerage licence is linked to its control of the largest bank customer base seen as offering it a head-start in stock market mediation.

Mike Rubia, a director at Francis Thuo & Partners, confirmed that the deal was at an advanced stage and was only awaiting certain approvals.

Mr Rubia said the owners of Francis Thuo & Partners had retained a minority stake in the brokerage – meaning Equity has only acquired a majority stake but not the entire company.

Stock market insiders, who declined to be named because of the sensitivity of the matter, said Equity’s acquisition of Francis Thuo had met stiff resistance from rival brokers who felt that Equity Bank’s branch network and customer base would give it unrivalled power in the market.

Equity’s investment arm has been an agent for four or five brokers – a multi-million shilling business that they now stand to lose.

“There was a feeling that the investment bank could become a monopoly in the market if allowed to enter the trading floor.

The NSE management is however said to have considered the market’s long term interests arguing that the bank could use its large customer base to recruit new investors for the bourse.

The brokers’ sensitivity to the sale was apparent in the NSE’s Monday statement that announced Equity’s entry into the market.

(READ: Equity’s broker licence signals shake up of stock market)

NSE vice-chair Bob Karina said the exchange had considered the mass market platforms of Equity and CBA in awarding them trading licences.

“CBA Capital intends to leverage on the M-Shwari customer base to provide local and regional access to Kenya’s capital markets,” Mr Karina said.

“The Equity brand is associated with the empowerment of the unbanked and the poorly banked segments of the population it could use to help expand the market.” Equity Bank had over 8.2 million customers in Kenya alone by the end of last year.

When the NSE goes for self-listing later this year, Equity is expected to leverage on the large number of account holders to ensure the success of the initial public offering (IPO).

In a separate interview, investment advisor Andrew Franklin agreed that the award of a brokerage licence to CBA Capital would advance use of M-Shwari platform to link investors to the NSE.

But Mr Franklin wondered whether there was still much business to be done at the exchange, noting that international investors had declined and there are still limited new share offerings.

CMA data shows that net cash flows from foreign investors dipped to Sh2.6 billion in June compared to Sh3.0 billion in April and Sh3.5 billion in May. There are 62 companies listed on the NSE.

A source said the admission of new players to the bourse was intended to rid the exchange of the image of a closed shop that is in the hands of a cartel.

The head of product and marketing at the NSE, Donald Ouma, admitted that a transaction had taken place between Equity Bank and Francis Thuo & Partners but stressed that it was a deal in which the exchange had little information.

“Negotiations were done by the two partners and so we were not directly involved. We don’t even know about the price they agreed,” said Mr Ouma insisting that the price would not be a reflection of the value of the exchange.

The NSE is in the process of demutualisation that seeks to separate its ownership from the trading rights. The goal is to retain the trading rights with brokers but allow other owners to come on board.

The entry of CBA Capital brings to 23 the number of trading participants at the bourse.

The brokers have agreed to reserve a 10.2 per cent stake to the government and retain the rest, completing a long-awaited shareholding negotiation process.

Head of CBA Capital Kathure Githinji-Nyamu did not respond to our request for a comment. Commercial Bank of Africa is associated with the family of President Uhuru Kenyatta.

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