Nakumatt seeks capital injection to ease debt load

Kenya’s largest retail chain Nakumatt Holdings is close to signing a deal with a strategic investor that will see the supermarket get fresh capital injection to ease the heavy debt burden in its books.

The impending deal is disclosed in a new report by Global Credit Rating (GCR), the South African firm authorised by the capital markets regulator to assess the creditworthiness of Kenyan companies seeking debt or investment partners.

GCR says that Nakumatt’s profitability is being eroded by interest payments on loans that the retailer has borrowed for working capital.

“Management is in advanced negotiations with a third-party investor to inject new capital into the business, which would markedly improve the group’s credit risk profile and provide funding for medium term growth,” says GCR in the report dated December 23.

However, it cautions that several other reported negotiations with strategic investors had flopped.

“GCR notes that previous deals have not come to fruition.” The Nakumatt managing director Atul Shah said in an interview earlier this year that the retail chain, which operates about 47 branches in Kenya, Tanzania, Uganda and Rwanda, is worth an estimated Sh34 billion.

The heavy working capital requirement is attributed to the need to stock new branches for the fast-expanding retailer.

Nakumatt is reported to be in the process of acquiring three Shoprite outlets in Tanzania as it seeks to deepen its regional presence, in a deal that could further strain its cash position.

READ: Nakumatt set to take over Shoprite stores in Tanzania

GCR notes that Nakumatt’s working capital absorptions totalled Sh3.5 billion this year, most of which are short term.

“Much of the debt raised has been short term in nature, placing liquidity pressure on Nakumatt. In addition, the high cost of funding has materially eroded operating profits, with interest cover measures remaining below two times in 2013 and first half of 2014,” read part of the credit rating report.

The lower the interest cover ratio is the more a company is burdened by debt expense. GCR retained Nakumatt’s BB rating with a positive outlook.

The retailer is recovering from the September terror attack at its Westgate branch which led to closure of its biggest branch. The retailer has recovered well from past disruptions including the fire at Nakumatt Downtown and the closure of its Thika Road branch to pave way for expansion of the highway.

Mr Shah told a parliamentary committee investigating the terror act that stock lost at the Westgate branch was valued at Sh1.6 billion in addition to three vehicles that got burnt. He said the supermarket was insured against acts of terrorism for 60 per cent of the total cover.

Nakumatt which controls about 40 per cent of the Kenyan retail market, had in mid-July told Business Daily that it intended to sell a quarter of its shares to a strategic investor.

Following the terrorist attack in September at Westgate Mall where Nakumatt was the anchor tenant, the retailer’s management said the equity sale had taken a back seat.

Buyout talks with a consortium led by London-based private equity firm Satya Capital collapsed in 2009 forcing Nakumatt to turn to bank loans to fund its expansion drive.
Satya Capital is associated with Sudanese billionaire Mo Ibrahim.

Nakumatt is currently owned by the Shah family and Hotnet Ltd, a company associated with former Kilome MP Harun Mwau. Mr Shah said earlier that the family would retain majority control of the retailer.

Other retailers have also been turning to debt to finance their expansion plan with Uchumi receiving a Sh300 million loan from government agency, Industrial and Commercial Development Corporation (ICDC).

Poor debt management saw Uchumi face near collapse in 2006 as it was declared insolvent. Uchumi had Sh956 million debts owed to KCB and PTA bank.

Other Nakumatt competitors include Tuskys which recently expanded in the city by acquiring rival Ukwala’s outlets and Naivas Supermarkets.

The retail segment has witnessed growth in the recent years following a burgeoning of the country’s middle class. The formal retail segment has been ranked second to South Africa on the continent.

The growth has attracted international investors with Massmart, majority owned by American giant Walmart, making attempts to buy a stake in Naivas.