Tuskys owners risk loss of shares in Sh2bn deal

The investor intending to provide Tuskys with a Sh2 billion loan seeks to secure the debt using all of the supermarket operator’s shares, putting the ownership of the existing shareholders at risk in the event of default.

The unnamed investor, based in the tax haven Cayman Islands, is ready to disburse the funds but wants Tuskys’s shareholders to approve the deal, including committing the shares.

This has forced Tusker Mattresses Limited, the owner of the Tuskys brand, to summon a shareholder meeting for September 28 to approve the use of the shares as security for the debt, according to a notice seen by the Business Daily.

Tusker Mattresses Limited is owned 100 percent by Orakam Holdings (the investment vehicles of the children of the founder Joram Kamau who died in 2002).

Stephen Mukuha, Sammy Gatei, Yusuf Mugweru and George Gachwe each own a 17.5 percent stake in Orakam. John Kago, Mary Njoki and Kenneth Njeri who each hold a 10 percent stake in the company.

“A notice has been sent for shareholders of Orakam on September 28, 2020 to validate negotiations of receiving $20 million (Sh2.1 billion) from an offshore fund,” Mr Mugweru’s lawyer, Philip Murgor, said.

If they agree to the proposed terms of the loan, the heirs will be betting on the amount to be sufficient to turn around the fortunes of the struggling retailer.

A rebound in profitability will enable the company to repay the debt, releasing the shares to the heirs.

Further deterioration in the retailer’s finances will, however, leave the lender in control of the company in the event the retailer defaults on the loan.

The demand that the loan be secured by all of Tuskys’ shares indicates the lender’s view that the company’s creditworthiness has dropped substantially.

The retailer has been losing employees, stores, customers and suppliers over the past few months as its cash crunch worsened.

Like other big retailers, Tuskys has negligible assets compared to its debt load. This means that the chances of its lenders getting their money back depends on its ability to continue operating. In good times, retailers have been able to obtain unsecured bank loans running into billions of shillings.

Shoprite, which is exiting the Kenyan market, had for instance taken a Sh1.5 billion unsecured loan from Stanbic Bank Kenya.

Nakumatt Holdings had also obtained unsecured bank loans amounting to Sh6.9 billion by the time it collapsed in January 2018.

While Tuskys desperately needs to raise funds to stay in business, there is still uncertainty over whether it can close the deal with the lender.

Mr Mugweru, who has been feuding with his siblings, says he needs to ascertain the extent of the retailer’s indebtedness before signing the loan documents.

“Several conditions relating to the debt deal concerns our client, including holding the entire shares of Orkam as security which will be converted to equity on default,” Mr Murgor said.

“We are demanding to know the depth of Tuskys indebtedness, proposals for restructuring the company, including the board and executives. This will allow our client to determine the risk of losing his shares under the $20 million (Sh2.1 billion) debt.”

Mr Murgor added that if the information is not provided by today (Thursday), his client will to go court and seek postponement of the shareholder meeting.

He noted that Mr Mugweru has up to Friday to file an objection to the meeting.

Tuskys last week said it had received Sh500 million, being the first tranche of the Sh2.1 billion loan from the unnamed investor.

The company says it needs the full disbursement to survive in the short term as piling debt has resulted in supplier defections, stock-outs and closure of some stores.

“Having received the funds, we are actively releasing due payments to landlords, staff and suppliers,” the company said in a statement.

“In particular the first tranche of the suppliers’ old debt amounting to Sh321 million has been settled. In addition, the August arrears for suppliers on the online custodial trading platform have also been settled.”

It remains to be seen whether the retailer will raise the balance fast enough to remain in business. The company has lost several stores in recent weeks as landlords enforced their rent collection.

Nairobi Securities Exchange-listed ILAM Fahari I-Reit last week, for instance, closed the Tuskys’ branch at its Greenspan Mall in Nairobi over a Sh30 million rent default.

“Tuskys started showing signs of distress as a tenant earlier in the year with regards to the tenant’s obligations. As the Reit Manager, we have been in discussions with them to reach an amicable payment plan and warrant their continued operations at the mall,” Fahari said in a statement.

“The payment plan has been dishonoured by the client. In this regard, in order to cushion the investors, the manager has instituted a process to recover the arrears as per the debt management policy and legal provisions.”

Tuskys also owes suppliers more than Sh6 billion, with the retailer saying it has reached an agreement to pay 40 percent of the amount (Sh2.4 billion) over two years.

The company is currently being watched by the Buyer Power Department of the Competition Authority of Kenya (CAK) after it defaulted on supplier payments.

Buyer power means the ability of a purchaser to extract more favourable terms from a supplier on whom it can also impose significant opportunity costs by, for example, delaying payments.

Tuskys became the first major retailer to face the scrutiny of the Buyer Power Department that was created after former supermarket giant Nakumatt Holdings went under with Sh18.5 billion of supplier debt.