Economy

Why Deacons took step to list on NSE after four-year wait

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Deacons chief executive officer Muchiri Wahome. PHOTO | SALATON NJAU

Summary

  • We had to reorganise our business in order to ensure that we had a base of distribution agreements that could go into the future, and we now feel that we have achieved a sustainable model for the future.

Deacons East Africa this week became the latest firm to list on the Nairobi Securities Exchange (NSE), taking the number of actively traded companies to 65.

The fashion retailer, which had traded on the over-the-counter (OTC) market since 2010, first announced its intention to list on the bourse four years ago, but the move was kept on ice until this year.

Deacons chief executive officer Muchiri Wahome spoke to the Business Daily’s Charles Mwaniki on the firm’s journey to listing and the direction the firm wants to take.

It has been a four-year wait since you announced your intention to list on the NSE.

There were changes in the business relationships we had with our partners, particularly the one with Woolworths. This was a franchise agreement — a term agreement — in which we later came to an amiable understanding that they wanted to corporatise their business, and taking advantage of that they bought the business from us through a staged process.

We had to reorganise our business in order to ensure that we had a base of distribution agreements that could go into the future, and we now feel that we have achieved a sustainable model for the future.

In between you do get one or two shocks, which for us was the Westgate attack in September 2013, which affected our business significantly.
We were well invested in the Westgate centre, and shopping malls in general. Customers became very shy of those environments. We had to stabilise that first before going on to list. As a result we have become less reliant on the Nairobi business, and have increased our revenue streams from both a product and a geographical perspective.

Sometimes if you rush you end up with the wrong end of the stick.

The directors had already opened up the company from the four original owners to institutional investors in 2002-2003, and then in 2006 they took on more institutional investors, though keeping the business a private company.

In 2010 we went public and started trading on the OTC, opening up the company to much more scrutiny and accountability, and that is the basis for the listing this week.

You have said that you are not listing in order to raise capital, especially now that you have nearly issued all your authorised shares. Why then are you going public and how will you finance the business going forward?

Primarily the listing is to offer the shareholders an opportunity to realise the real price of their shares. Under the OTC environment that we have been operating in previously, it is a very laborious process to buy and sell shares.

This gives them the opportunity to buy and sell easily.

It also offers us a future opportunity or option to raise capital in more ways than just debt funding from commercial banks, and it also raises our profile.

At the right time, the directors will decide on how to deal with the issue of whether to raise the number of shares, especially in the event we require a rights issue. We will definitely need more capital in future, but the way in which it will be attracted will depend on the business’ financial requirements on the day, and market conditions.

We are opening new outlets which are being financed using debt, although we recognise that this debt is quite expensive in line with the cost of borrowing in this country. There is therefore a need to diversify or refinance that debt, so we’re working with our advisers to see the available options.

Tanzania was a tough market for you, leading to an exit in 2012. How are you planning to tackle that market in your regional expansion plans?
The business environment is not easy anywhere, not even in Kenya, it is not easy to do business anywhere.

Tanzania was a difficult ground for us, but it was a learning experience. The directors did the right thing to understand that maybe we went in too early so they cut their losses sooner rather than later.

That at least leaves us with the opportunity to relaunch operations there. As we speak today, however, we are still operational in Tanzania through the Life Fitness brand, which is a business-to-business operation that gives us channels we can use later to go back into the Tanzania market, which is big and growing. We cannot ignore that side of East Africa.

The important thing is to understand the risk a business faces, especially away from home. There are inherent risks in each of these countries in the region, which one must be aware of when venturing there. What we do to mitigate the risks is the important thing.

Competition in the clothing retail sector has grown exponentially in recent years, especially with cheap imports coming into the market all the time. How do you plan to tackle this risk?

This is a big concern in an emerging market like ours. A majority of the players in the sector in which we operate are not tax-compliant, whether from an import, VAT or corporate tax perspective.

We have been at the forefront of lobbying government, looking to better understand why they do the things they do on the tax issue. There is an opportunity for the Kenya Revenue Authority and their Ugandan and Rwandese counterparts to bring more people in this sector into the tax net to level the playing field for people like ourselves who comply with the tax obligations.

We are not suggesting new taxes, but rather want people to be brought under the tax net. We hear often about routes through Eldoret, Eastleigh and others where products are coming through untaxed. Those people should be brought into the tax net.

Now that you are listing and will be under pressure from new shareholders for returns, what are your targets for the business?

We got Sh2.3 billion last year in revenue and are looking at doing Sh3 billion this year. The directors have set a target of Sh6 billion in 2020, so we are looking at doubling our revenue.

In terms of expansion, there is a big opportunity. We have only one outlet in Mombasa, and we think the city can take two more brands. The other big county headquarters are showing impressive commercial interest in terms of property development and consumerisation, and we think we can play a role in towns such as Nakuru, Kisumu, Eldoret and Meru.

We are in negotiations with various parties in each of these towns.

You also closed your employee share ownership plan (Esop) just before listing. Are you planning a new one?

We are currently evaluating a new Esop programme, which is a key tool to attract and retain good talent. I am hopeful that before the year ends a new Esop programme will be proposed and adopted by the board of directors.

At this point it will be difficult to go specific and say which employees will be able to benefit from the plan, since the proposal has not been adopted by the board. But the programme should give the staff across leadership through to sales a chance to participate.

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