Lessons from TransCentury woes

The woes of TransCentury did not come as a surprise given a series of strategic missteps in its business model. It was meant to be a stand-out investment firm focusing on infrastructure in the region, and for a moment it was.

From the onset, was an infrastructure-focused holding company whose philosophy was to pursue underpenetrated and inefficient markets.

It has a presence in Kenya, Uganda, Tanzania, Rwanda, the Democratic Republic of Congo and South Africa and through this geographical diversification, it had access to high-potential investment opportunities across sub-Saharan Africa.

It segmented its operations into five divisions, namely power infrastructure, transport infrastructure, specialised engineering, consumer and affiliated investments.

The power infrastructure division remained the main focus of its operations and comprised majority ownership in East African Cables, Tanelec Zambia, Kewberg Cables & Braids, and Cableries Du Congo.

These companies manufacture products that go into key infrastructure including electrical cables and conductors, transformers and switchgears.

It is premised on a growing demand for electricity. The specialised engineering division consists of Avery (EA), a company with distribution rights and maintaining weighing solutions.

Avery’s growth story was premised on (i) increased power generation and transmission in the region and (ii) increased need for compliance with product weights, and safety standards.

It was also a rural electrification and a Kenya Power-approved engineer. And it did quite well before things changed.

On the transport division, TransCentury owned 34 percent of Rift Valley Railways (RVR) with Citadel Capital Corporation of Egypt owning 51 percent and Bomi Holdings of Uganda owning the remaining 15 percent.

The history of the acquisition dated back to 2006 when TransCentury entered into a contract to acquire 20 percent of shares in RVR Investments (Proprietary) Limited (RVR), a company organised under the Laws of Mauritius.

The total investment was worth $ 9 million payable in full.

TransCentury increased its stake in RVR by providing emergency loans and meeting capital calls as well as through a secondary share purchase of 12.07 percent from Ventures Limited (AVL), a subsidiary undertaking of Citadel Capital of Egypt.

This saw the company increase its stake in RVR to 34 percent.

The company had bet big on this concession and had planned to invest $ 300 million for capital expenditure (CAPEX) by 2015, out of which $164 million was to be debt funded and the balance through equity financing.

Further, 70 percent of CAPEX was to be directed at the rehabilitation of locomotives and wagons. Then nasty things happened with this concession (and money was lost).

I was a junior sell-side equity analyst when TransCentury dropped into my coverage universe. The board brought in a team of ex-Wallstreet to run the company.

The picture was rosy. The company eventually went public by way of introduction in July 2011 with a close price of Sh57 a share for the day. Then a series of missteps led to the company’s woes.

Ultimately, TransCentury’s struggles offer two critical lessons for investment firms. First, do not overstay assets.

An investment firm’s core objective is to fatten the bull within a defined time horizon, typically five years, after which it realises the full value.

Overstaying an asset increases execution risks which may negatively impact the realisation of its value.

Strictly speaking, TransCentury should have exited its power assets a decade ago (just like it did with its consumer business in a timely manner).

Secondly, by funding investments through debt, TransCentury created value for its shareholders on the liability side of the balance sheets through price transformation.

Basically, borrowing at rates lower than the return on the investments (just like commercial banks engage in maturity transformation).

For instance, as of May 2021, the company disclosed that the amount of debt at the holding company level stood at Sh4.3 billion, which was all dollar-denominated and priced at above eight percent.

The proceeds were all used to acquire equity stakes in portfolio companies.

Essentially, if you are using debt to fund equity transactions then better make sure the returns are good enough to cover the cost of the debt and returns to shareholders. This wasn’t the case with TransCentury.

The writer is a thought leader.