Billionaires battle for soul of cement firm

Billionaire Jaswant Rai will have to deposit a guarantee of Sh6.5 billion if he wants to stop the sale of Athi River Mining (ARM) to Devki Group, which is owned by his business rival, Narendra Raval.

The two billionaires are set to face it off in court where the Capital Markets Authority (CMA) is expected to file an advisory following investigations into the decision to sell the cement manufacturing company to Nairobi Cement, a subsidiary of the Devki Group.

National Cement has offered to buy out ARM for Sh5 billion but Mr Rai's company, the Rai Group, has indicated that it is willing to pay Sh1.5 billion more for the listed cement firm that has run into financial headwinds. The indebted company has been under administration by PricewaterhouseCoopers (PwC).

CMA boss Paul Muthaura has said the offer that PwC made to Nairobi Cement was above board and that the court should only halt the sale if Mr Rai gives a guarantee that he will put in the money he has promised.

Unless this is done, there is a risk that the offer by National Cement will be scuttled and PwC left without a buyer for the troubled cement firm, which is also listed on the Nairobi Securities Exchange. #ticker:NSE

"Noting the commencement of judicial proceedings by the Rai Group, in the event that the Rai Group are able to present to court irrevocable evidence of funding for the full value of their bid of Sh6.5 billion ($65 million), the court should have due regard to the availability of any such binding bid from the Rai Group in making its determination of the applications before the court," Mr Muthaura said in a report seen by the Business Daily.

The need to prove the investors can fund the deal is at the centre of the contested sale. On May 17, Pradeep Paunrana, who was the majority shareholder and managing director of ARM, submitted a bid through a consortium with Rai Group, seeking to buy the business back for Sh6.5 billion.

In court filings, Mr Paunrana claims that this bid was summarily rejected after a cursory review without seeking feedback and on the basis that an agreement had already been signed with another party.

However, in his reply, PwC’s Muniu Thoithi -- one of the two administrators of the collapsed business -- claims the offer lacked proof of funding as it only had an expression of interest from Baraka Fund, which was offering to finance the bid.

Transaction advisor

When National Cement said it was willing to buy ARM, the transaction advisor asked for proof of funding to finance the proposed transaction as well as confirmation of the source of the funds by April 15.

Nairobi Cement then forwarded Letters of Comfort from I&M Bank and KCB and on April 24, it went further and enhanced its offer from the initial Sh4.6 billion ($46 million) to Sh5 billion ($50 million).

It also committed to provide the unconditional bank guarantee of 20 percent of the offer value on the date of signing the agreement.

"Nairobi Cement provided the unconditional bank guarantee of Sh1 billion dated May 20, 2019 upon signing of the agreement on May 20, 2019," Mr Muthaura said.

By that time, however, the Rai Group, which had not participated in the expression of interest or the non-binding offer and binding offer stages, had submitted a binding offer on May 17 of Sh6.5 billion ($65 million) with a letter of financing comfort from Baraka Fund to the tune of Sh6 billion ($60 million).

This offer is what has caused the current stand-off between Mr Rai's and Mr Raval's companies and PwC, prompting the markets regulator to intervene since ARM is a listed company.

Inheritance

The battle between the two billionaire industrialists is one that sets their families against each other in their race to absorb the wealth of the Paunranas, who have roiled their inheritance.

Mr Pradeep Paunrana is the son of Harjivandas Paunrana, the patriarch who founded ARM Cement, which grew to become a listed company only to end up under the auctioneer's hammer after a borrowing spree that saw creditors put it on receivership.

Should the Devki Group succeed in buying out ARM, it will to become the second largest cement maker in Kenya.

The company, which manufactures the Simba Cement brand under the National Cement subsidiary recently acquired Cemtech, which holds limestone and clay deposits, as well as the requisite licences for the deposits in West Pokot County.

Limestone and clay are key inputs in clinker production. Clinker is a critical raw material in the manufacture of cement.

According to data published by the Kenya National Bureau of Statistics last December, Bamburi Cement is the market leader in the sub-sector with a market share of 33 percent.

It is followed by Mombasa Cement at 16 percent, East African Portland Cement Company (15 percent) and Savannah Cement (15 percent) as at December 2018. National Cement was at eight percent while Athi River Mining Africa was at 13 percent.

The ARM deal would put the Devki group slightly ahead of Mombasa Cement if the deal sails through. But all that now depends on Mr Rai and his company, the Rai Group, which recently acquired the Webuye-based Pan Paper Mill.

The company also has interests in wood manufacturing, sugar milling as well as the manufacture of cooking oil and soap. It pursues these interests through its subsidiaries; Menengai Oil, Western Kenya Sugar, Sukari Industries and Olepito Sugar Company.

Even as the fight to control ARM hits fever pitch, it has emerged that none of the bids came close to the true value of the assets that the administrators indicated stood at Sh9.2 billion even if the troubled cement maker was to be sold under distress.

"In assessing the bids presented, the administrators indicated that their determination was not based solely on valuation reports procured, which indicated the Total Forced Asset Valuation for ARM Kenyan Assets as Sh9.2 billion," Mr Muthaura said.

Deal above board

However, the CMA said the Devki deal was above board despite allegations of wrongdoing on the part of the administrators and alleged conflict of interest of the Absa Group, the transaction advisor, which was also a secured lender through Barclays Bank, its Kenyan subsidiary.

"Based on the information supplied and reviewed, the grounds of the complaint... have been assessed and are not supported by the findings," said Mr Muthaura.

"In this regard, the decision to award to Nairobi Cement at $50 million appears to have been reasonable, based on the information available to the administrators as at May 20, 2019."