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Mwalimu Sacco gets green light to buy Merali bank

 

The purchase of billionaire Naushad Merali’s Equatorial Commercial Bank by Mwalimu Sacco has finally been given the go-ahead, giving the businessman an opportunity to make Sh2 billion windfall from the sale of the 32-year-old bank.

Mwalimu is the largest sacco in the country with a membership of 60,961 and savings of Sh18.3 billion. It intends to sell 40 per cent of Mwalimu National Holdings, the vehicle used to invest in ECB, to members.

A commission set up to investigate the controversial deal gave a nod to the transaction and turned the tables on the complainant, the Co-operative Alliance of Kenya (CAK), by calling for a competitive recruitment of its chief executive.

It accused CAK chief executive Daniel Marube, who had called for the Industrialisation and Enterprise ministry’s intervention, of having played to the tune of external forces who did not wish to see the sacco’s entry into the banking space.

CAK had asked the ministry to authorise reversal of the transaction which saw Mwalimu pay Sh1.6 billion to acquire an immediate controlling stake of 51 per cent in the bank and an additional Sh1 billion for a 24 per cent stake in the second half of the year.

But in its report, the commission appointed by the ministry to investigate the deal said that “the demand of reversal of the transaction has no merit and should be ignored.” It also disclosed that the sacco had considered buying into K-Rep Bank, Transnational Bank and government-owned Consolidated Bank before settling on Equatorial Bank.

The go-ahead makes Mwalimu the first sacco to buy a commercial bank and sets a precedent for other saccos that had been toying with the idea of converting into banks.

The purchase had almost come a cropper after CAK voiced its opposition to the deal, arguing that the sacco management had ignored concerns raised by consultants Ernst & Young in their due diligence report and had not sought members’ approval to conduct the transaction.

The deal had first received approval from the Competition Authority on December 26 last year and Central Bank of Kenya on December 31, allowing its conclusion before the turn of the year when the capital gains tax was coming to effect. It was also approved by the Sacco Societies Regulatory Authority (Sasra).

Parliament had also taken up the matter with the committee on Agriculture, Livestock and Co-operatives set to probe the transaction. But by Monday, they had not progressed.

“I took up the matter personally when I realised it was taking a political life. I hired a private consultant to advise me and I had no reservations to stop the stone from rolling,” said Sasra chief executive Carilus Ademba.

Mr Ademba had come under fire from ministry officials for approving the transaction.

In its final report, the government-backed enquiry noted that even Ernst & Young had advised a go-ahead but warned about the bank’s credit management.

Ernst & Young said ECB was not maintaining proper classification of loans raising uncertainty on the sufficiency of its provisions of bad loans.

“The bank could have made a loss in 2013 if it set aside enough provisions,” noted Ernst and Young.

In the new deal, Mr Merali, a majority owner of the bank, will pocket Sh2 billion while the balance of Sh600 million will be injected to steady the business.

The Ernst & Young report had previously noted that the synergies between the bank and the sacco would bring in more capital and turnaround the lender to profitability.

ECB reported losses in 2009, 2010 and 2012 which was attributed to strained capital position given that Mr Merali – the majority shareholder – was not allowed to inject additional funds by the CBK.

The regulator barred additional investment by Mr Merali in the bank because his ownership was already higher than the maximum allowed to an individual.

Mr Merali is said to have owned 85 per cent of the lender against a legal limit of 25 per cent.

The report said the billionaire loaned the bank Sh300 million last year and an additional Sh100 million from his investment vehicle Sameer Group repayable at the end of 2015.

The current transaction forms a long list of large ticket deals sealed by the shrewd businessman in the recent past, including the 2013 sale of his 49 per cent stake in Internet service provider Swift Global and 19.2 per cent equity in fibre infrastructure firm KDN to British firm Liquid Telecom.

In business transactions, Mr Merali is a household name. His business ingenuity was put to the fore when he used his pre-emption rights to buy out Vivendi, a business partner in mobile operator KenCell, at $230 million only to sell the stake at $250 million the same day to Celtel International — earning a huge profit of $20 million.

The sale also puts Mwalimu, which announced a 12.15 per cent dividend payout to its shareholders on share balance as at end of last year, in a class of its own.

The sacco cleared its outstanding loan with Co-operative Bank and took up a Sh1.5 billion revolving fund with KCB.

After the transaction, the ECB headquarters will be at Mwalimu Towers, a 17-storey building being constructed by the sacco at Upper Hill following sale of Equatorial Towers last year.

The sale of the building had formed part of the concerns raised by those wary of the deal, citing it as possible hiving off of assets by the lender before conclusion of the deal.

The building sale was sanctioned by CBK in order to restructure the balance sheet of the bank.

Ernst & Young had recommended valuation assessment of the building before its sale, having been last valued in 2011 by Knight Frank at Sh900 million.

The building was sold to Fidelity Insurance which is also owned 24 per cent by Equatorial Commercial Holdings at Sh475 million.

The acquisition in Equatorial Holding Company gives the sacco ownership in Equatorial Insurance Brokerage and an indirect interest in Fidelity Shield Insurance.

It is the ownership of an insurance firm that gave it an edge over other lenders considered for acquisition by the sacco and the willingness of the shareholders to sell.

One of their considered acquisitions, K-Rep Bank was majority acquired last year by listed investment firm, Centum. Centum acquired an additional stake of 60 per cent in the lender to put its total stake at 67.6 per cent at a cost of Sh2.5 billion.

The sacco had also considered buying Consolidated Bank but the government has been dragging its feet over the sale. The bank is currently financially strained due to government failure to pump in additional funds to support its growth.

Another consideration was Transnational Bank, associated with powerful members of the Moi regime and which is strong player in agricultural financing with a strong presence in the Rift Valley.

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