On January 12, 2023, Centum Investments Company announced that it had called off the sale of its 83.4 percent stake in Sidian Bank to Access Bank, after the expiry of a six-month binding share purchase agreement.
This was quite unprecedented given Centum’s checkered history of consummating transactions. That said, Sidian was the first investment in a commercial bank that Centum made and it has proved a bit challenging.
First, a bank creates value from the liability side of the balance sheet.
It makes money on the spread between the interest it pays to those from whom it raises funds (depositors) and the interest it charges those who borrow from it, and from other services it offers its depositors and its lenders.
The speed and extent to which they create this value require a combination of patience and continuous capitalisation of the business.
Further, most financial service firms operate under a regulatory framework that governs how they are capitalised, where they invest and how fast they can grow.
Changes in the regulatory environment can create large shifts in value. Essentially, shareholders must first meet regulatory demands before they can think of cash distribution (and most of the time shareholders go home empty).
To this end, Centum has had to gradually recapitalise the bank to the extent that total investment had grown to Sh4.8 billion.
At the same time, Sidian has not written any dividend cheques to Centum since its inception.
This is somewhat contrary to Centum’s historical penchant for cash-generating businesses.
You could also say that Centum was not lucky with the timing of the investment.
Two years after gaining control of the bank, the interest rate caps were introduced, which negatively impacted value creation (since banks were unable to appropriately price for risk).
The law was eventually repealed in November 2019 but then four months later the Covid-19 pandemic arrived on the scene, shutting down economies for two and half years.
The failure to consummate this transaction leaves Centum in a precarious position. The company had planned to retire Sh2.3 billion worth of debt using part of the proceeds from the sale of the asset.
That is unlikely to be achieved.
Consequently, its plans to de-leverage the balance sheet by fiscal year end March 2024 may not materialise.
Secondly, there is now a risk of overstaying the asset since there is little value creation headroom. That’s a problem given that the investment was debt-funded.
Being a private equity entity, Centum has largely been a specialist in fattening bulls using debt within a given timeframe and then exiting at decent multiples.
The exit proceeds are then deployed into deleveraging the balance sheet; funding new acquisitions and distributing to shareholders.
In the last six years, it exited nine investees, realising Sh33.4 billion in exit proceeds, out of which, it says, Sh20 billion went back to providers of capital (both debt and equity).
Thirdly, the transaction falling through after a six-month share purchase agreement could also send the wrong signal to the market and could invite increased scrutiny from future potential buyers.
Another problem is that portfolio allocation has also lacked optimality. Over the past decade, the company has reduced its private equity holdings from half of its net-asset-value (NAV) to a fifth, and increased exposure to real estate to two-thirds.
Obviously, the huge shift in the allocation hasn’t impressed the market.
This calls for the monetisation of the portfolio and the rebuilding of the private equity portfolio.
It appears the market liked it when the company was overweight on private equity because of cash generation.
The company’s stock price-to-NAV continues to widen and not even share-buybacks can arrest the roll.
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Note: The results are not exact but very close to the actual.
