CMA has its work cut out over Carbacid-BOC deal

Carbacid Investments Plc and related party, Aksaya Investments LLP, offer to buy 100 percent of BOC Kenya Plc in November last year is a public matter.

There are some aspects of this deal I find interesting but seem to have been unappreciated. Most acquisition deals begin with the potential acquirer approaching the target company for discussion of an offer or, in a harsher manner, directly serve the latter’s board of directors with an offer that they are obliged to show the shareholders. In this case, the target company’s (BOC) majority shareholder – The Linde Group – offered to sell its entire shareholding to the potential acquirer (Carbacid Investments Plc).

Carbacid’s offer

Linde Group, therefore, agreed through an irrevocable undertaking, to accept Carbacid’s offer and sell their shares (representing 65.38 percent of BOC Kenya).

Following this irrevocable undertaking, Carbacid/Aksaya simply extended the same offer to all owners of the remaining 34.62 percent shares. This deal, as many may have interpreted, was not conditional on meeting a certain level of shareholder acceptance by BOC as is the case with several acquisition offers.

In effect, Carbacid is buying a majority stake in BOC and simultaneously serving a tender offer to the minority shareholders. As a minority shareholder of BOC Kenya, you could tender your shares and get Sh63.5 per share in cash or decline and stay invested in the “new” BOC Kenya Plc – the one controlled by Carbacid.

The Carbacid/Aksaya buyout was to close on April 6, but this never happened. Former chairman and 7.6 percent shareholder of BOC Kenya, Mr. Ngugi Kiuna, filed an objection to the Capital Markets Authority Kenya (CMA) in mid-March, citing that the Carbacid offer was unfair and grossly undervalued BOC Kenya and hence the CMA shouldn’t have approved it. The CMA then directed that the offer be put on hold, pending a tribunal hearing on the matter.

Before that, BOC Kenya Plc Board of Directors declined to recommend the offer to its shareholders and told them to seek independent advice on whether they should offer their shares or not. This was based on a report published by Dyer & Blair Investment Bank that put a valuation on each BOC Kenya Plc share at Sh91.76.

Controlling shareholder

I found this was interesting. The controlling shareholder of BOC Kenya Plc since 1940 offered to sale their shares at Sh63.5 while a report by an investment bank says the fair value is Sh91.76.

I am not going to debate valuation methodologies and assumptions here. We should instead appreciate how business valuation can differ in theory and practice. In theory, it’s neat, accurate and sounds intelligent when explained over a Power Point presentation. In practice, it’s difficult, very relative and hardly accurate as several unknowns hover.

A willing buyer/seller discussion came to Sh63.5 per share. A team of smart investment bankers using Excel and globally accepted valuation methodologies came up with a value 40 per centhigher – Sh91.76 per share.

If you are interested in business, you should ask yourself why such a discrepancy exists. I find it hard to believe that Linde Group, who know the business so intimately, would sell out at a ridiculous undervaluation.

I also fully understand how Dyer & Blair looked at the balance sheet, saw the properties the company owns and the liquid assets among others and ruled that Sh63.50 per share undervalues the industrial and medical gases manufacturer. Obviously, business valuation is much more complicated than PEs and book values.

Price discovery

Back to the CMA action. The core role of the CMA as a regulator is to protect investors from unscrupulous market participants, fraudulent securities offers, ensure investors have necessary information, among other things. I do not see the CMA’s role in blocking a share offer that “potentially” undervalues or overvalues a company.

The whole point of a securities market is price discovery. If I put out a tender offer to all Safaricom Plc shareholders today to buy out their stock at Sh20 per share, and secured all the regulatory approvals, would I get any shares? Obviously not. Investors are in the market to bid and offer, every day, all year round and that’s how price is discovered.

Based on the fundamental role of price discovery in a free market, I totally disagree with the CMA blocking Carbacid from buying Linde Group’s shares on a price that both parties agreed to and wasn’t even far from where the stock has traded for the last 12-14 months. All minority shareholders – including Ngugi Kiuna – could have rejected and not sold their shares to Carbacid. If a BOC Kenya shareholder truly believes the value of the company is worth much more than Sh63.5 per share, all they must do is hold their stock.

Prudent investor

In fact, if the bid was so low, another market participant could have/can come up with a better price to offer the BOC Kenya shareholders. No one will take Sh63.5 per share when an offer of say, Sh80 per share is available.

Yes, it is very possible Carbacid could be attempting to buy BOC Kenya at the lowest possible price, but that is expected of any prudent investor/buyer. After all, it is equally possible that a few years into controlling BOC Kenya, the purchase price turns out to have been rich.

Acquisitions are like that. You won’t know exactly what you’re buying until you already own it. Carbacid Investments Plc also has a duty to its shareholders to use its capital wisely. As a shareholder of Carbacid Investments, it would concern me if the company was willing to pay exorbitant prices for acquisitions just because it has the cash.

Additional capital

Carbacid Investments Plc has, through its operating subsidiary Carbacid Ltd, mined and sold CO2 gas to manufacturers across sub-Sharan Africa for the past 50 years.

Today it sits on accumulated cash equivalents of Sh2.4 billion ($21.8 million). It is worth noting that this has been achieved without raising additional capital from shareholders since 1975 or deploying debt financing and distributing about Sh2.8 billion ($25 million) in dividends to its shareholders since the year 2000.

Today, it is the local investor that has come up to buy out a foreign investor in a Kenyan company. Usually, we have the reverse.

I don’t think Linde Group is willing to invest any additional money to upgrade to expand its Kenyan operation given a decision was taken at group level to divest from East and West Africa. Carbacid Investment, on the other hand, has the capital and local expertise to do so. I hope the CMA see through this clearly and offer its much-needed voice.

Kamara is an individual investor and holds Carbacid Investments Plc shares