While ARM has not yet revealed the identity of the institutional investor it is negotiating with, the prospective investor is reportedly India’s largest cement producer, UltraTech.
The investor will be allocated preference shares that it will have the right to convert into ordinary shares in 2023.
The firm intends to use the new cash to pay down debts that have weighed down its earnings.
ARM Cement will cede shares to a strategic investor in seven years in exchange for a $125 million (Sh12.7 billion) cash injection that it is currently negotiating for.
The convertible loan, in the form of preference shares, will earn interest at a yet-to-be-disclosed rate.
While ARM has not yet revealed the identity of the institutional investor it is negotiating with, the prospective investor is reportedly India’s largest cement producer, UltraTech.
The investor will be allocated preference shares that it will have the right to convert into ordinary shares in 2023. The Nairobi Securities Exchange-listed firm intends to use the new cash to pay down debts that have weighed down its earnings.
The firm’s short term debts jumped 35 per cent to Sh14.4 billion in the nine months ended September, raising its finance costs 3.3 times to Sh1.1 billion.
This contributed to its net loss of Sh469 million in the same period, reversing the net profit of Sh1.1 billion the year before.
“This long-term structured instrument is likely to be of seven years tenor and, on conversion to ordinary shares in the company, is not expected to reach the threshold that would require a mandatory take-over bid, based on the company’s current issued share capital,” ARM said Monday in a statement.
This means that ARM expects the investor will be allocated a stake of less than 25 per cent when the preference shares are converted into equity.
Any investor who acquires a 25 per cent stake in a listed firm is deemed to be interested in taking over the company and is required to comply with the set buyout procedures, according to Kenya’s Capital Markets Authority (CMA) regulations.
The CMA may grant an exemption from such takeover requirements on various grounds after an application for such a waiver is made.
ARM’s projection that the investor’s stake will not hit the regulatory threshold is a signal that the cement producer anticipates the value of its business to have grown significantly in the intervening seven years.
Assuming the preference shares are converted today, they would entitle the investor to a 42.7 per cent stake in ARM based on the company’s current market capitalisation of Sh17 billion.
The strategic investor will in the end emerge as one of the single-largest shareholders of ARM alongside the family of its CEO, Pradeep Paunrana, whose equity currently stands at an estimated 51 per cent.
Prior to their conversion, ARM is expected to pay hundreds of millions of shillings in interest on the preference shares. Also known as preferred stock, the securities usually have a higher priority claim on the company’s assets and earnings than ordinary shares.
Their contract generally requires that they are paid a fixed rate of dividend –amounting to a form of interest— first before any dividends are paid on ordinary shares. Prior to their conversion, preferred stocks typically don’t have voting rights.
ARM says the cash infusion will help settle its debts and fuel its regional growth plans .
“The board and management of the company believe that this investment would, if made, strengthen the financial position of the company as it executes its regional growth plans,” ARM said in a statement.
ARM also saw its unrealised foreign exchange losses increase 15.5 times to Sh2 billion, with sales rising at slower rate of seven per cent to Sh11.7 billion.
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