Britam on Monday served HF’s board with a takeover notice that, if accepted, would see Equity end its seven-year investment in the mortgage financier with a return of more than 500 per cent.
The deal is in line with Britam’s new-found deal-making ways that have recently seen it spend more than Sh1.6 billion in two acquisitions.
Equity’s disposal of its 24.76 per cent stake in HF is seen as driven by the new stringent rules that effectively curtailed the lender’s ambitious plans for the mortgage firm.
But keen observers of Equity’s plans also said the bank could be preparing to go big on home loans, making it imperative to exit HF – a potential direct competitor.
Britam said in a Press notice that it had served HF directors with the notice of its intention to acquire the 24.76 of the issued share capital of the company from Equity.
Britam holds a 10.1 per cent stake in Equity and already has a 21.46 per cent stake in HF, meaning the impending deal could push its ownership of the mortgage firm to 46 per cent.
Equity first bought into HF in July 2007 when it teamed up with Britam to acquire CDC Group Plc’s 24.99 per cent stake in a deal that saw the lender pay Sh433 million for its stake (20.17 per cent).
The two partners increased their stakes the next year when HF made a rights issue at the ratio of one-for-one in a cash call that the government and the National Social Security Fund (NSSF) skipped.
This saw Equity’s stake in HF rise to the current level, with Britam’s jumping to 21.46 per cent.
The twin transactions have overtime proved lucrative for the two institutions with Equity’s stake surging to the current market value of Sh2.2 billion based on HF’s share price of Sh42.75.
This means that Equity stands to harvest a return of more than 500 per cent, including dividends that the lender has been receiving from HF over the years.
The share has gained 64.3 per cent over the past year, making it the best performing bank on the Nairobi bourse over the period.
The finer details of the transaction will be revealed later but acquisitions of major stakes in publicly traded firms have traditionally featured a premium over the ruling market price.
Equity’s CEO James Mwangi has previously said that the bank did not buy into HF to receive a dividend but as part of a wider scheme to build a financial services empire that is present in all lending segments, including mortgages.
That plan has, however, recently faced regulatory challenges with new Central Bank of Kenya (CBK) rules requiring banks to loosen their grip on financial institutions that are not their subsidiaries.
The new rules left Equity with the option of taking majority ownership in HF to realise its ambitions that would have included control of the mortgage firm’s board and management or exiting.
Even as it is, Equity’s directorships in HF have caught the attention of the regulator as the mortgage firm is seen as lacking adequate number of independent directors.
HF recently appointed HR expert Gladys Ogallo as it moves to comply with the new corporate governance laws aimed at protecting the interest of small investors in public firms.
Ms Ogallo is the sole female director on Housing Finance’s eight-member board which is dominated by representatives of its principal shareholders including the NSSF, Britam and Equity.
The CBK gave the lenders until last month to ensure that at least a third of board seats are held by independent directors.
The banking regulator defines an independent director as a board member who is not a direct or indirect representative of the principal shareholders, has not worked in the bank as an executive for the past five years and has not had any business relationships with the institution for the same period.
HF needs to recruit two more independent directors given that it has opted not to replace its current board members. Significant suppliers of the lenders or relatives of senior managers and those with a direct or indirect shareholding of more than five per cent in the appointing banks are also not considered independent.
Representatives of Equity and Britam have dominated the board of the home loans provider since they bought stakes in it seven years ago.
Equity directors Peter Munga, David Ansel, Shem Migot-Adholla and Benson Wairegi (the CEO of Britam) sit on the board of HF.
The NSSF is represented by its chairman, Adan Mohamed. This left the firm’s chairperson, Steve Mainda, as the sole independent director.
The new regulations on independent directors are aimed at reducing the influence of principal shareholders on the boards as well as safeguarding the interests of minority investors whose power in the key decision-making organs has declined.
Ms Ogallo has previously served as head of HR at telecommunication firm MTN Business.
HF, like most Kenyan firms, has suffered from under-representation of women in the boardroom.
In 2010, Nancy Sabana was ousted as HF’s director alongside Naftali Mogere and Kung’u Gatabaki, the former chairman of the Capital Markets Authority, following a board coup engineered by Equity Bank and Britam — both had just acquired significant shares in the mortgage provider.
The exit from HF comes as Equity is preparing to launch its own mobile money services in partnership with Airtel, with the lender seeking to leverage its large retail presence to gain market share in a field dominated by Safaricom.
For Britam, the bid to raise its stake in HF marks its latest expansion spree that has seen it take a 25 per cent stake in property development firm Acorn Group for an estimated Sh300 million.
The company has also finalised its 99 per cent takeover of Real Insurance in a cash-and-stock deal worth Sh1.3 billion.
Britam is in the market seeking to raise Sh6 billion through a corporate bond whose proceeds will be used to fund the buyout of Equity’s stake in HF among other investments.