Companies

Co-op Bank acquisition triggers Jamii Bora row

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Summary

  • It has emerged that four institutional investors in Jamii Bora, owning a combined stake of about 45 percent, are not privy to the lender’s financial health or the details of the proposed transaction.
  • Correspondence reveals that the bank has not held an annual general meeting for at least two years, a period in which the four institutional investors were in the dark with regard to the company’s finances and strategy.
  • The new agreement means that existing shareholders will not take out any cash in the deal with Co-op Bank.

The move by Co-operative Bank of Kenya #ticker:COOP to acquire a controlling 90 percent stake in Jamii Bora Bank has exposed rifts among the existing shareholders of the small, capital-starved bank.

It has emerged that four institutional investors in Jamii Bora, owning a combined stake of about 45 percent, are not privy to the lender’s financial health or the details of the proposed transaction.

The investors — Shorecap II, private equity firm Catalyst Principal Partners, Cornerstone Enterprises and Nordic Microcap Investment — wrote to Jamii Bora’s chief executive, Timothy Kabiru, on June 24 seeking information about the company and specific terms of the deal with Co-op Bank.

Mr Kabiru responded to the shareholders on June 30 saying that Jamii Bora was not obliged to provide most of the information requested.

He added that other details, such as the financial position of the company that has not been made public for two years, will only be provided to shareholders after writing a formal request to his office.

The correspondence reveals that the bank has not held an annual general meeting for at least two years, a period in which the four institutional investors were in the dark with regard to the company’s finances and strategy.

It also shows that the transaction, in which Co-op Bank will pay Sh1 billion for new shares, is progressing without a definitive agreement on all the terms.

The new agreement means that existing shareholders will not take out any cash in the deal with Co-op Bank.

All existing shareholders of Jamii Bora will be squeezed into a 10 percent stake, making them passive investors as Co-op Bank takes control of the board and management.

The investors had previously eyed a combined Sh1.4 billion payday when they tried to sell the bank to former CBA Group #ticker:NCBA in January 2019.

Jamii Bora’s affairs show restriction of shareholder rights, including access to the company’s financial statements, the terms of the proposed transaction and a business plan supporting the buyout by Co-op Bank.

Public companies typically issue circulars to shareholders detailing the terms and nature of mergers, acquisitions and major business reorganisations, especially post transaction.

The four institutional investors asked the CEO to provide them with a copy of detailed offer terms from Co-op Bank.

They sought to know Co-op Bank’s formal promise on its rescue for the loss-making lender, level of compensation if the deal collapses technically known as break fees, whether the board of Jamii Bora has approved the offer document, and whether shareholders will be entitled to receive and approve the final definitive transaction documents.

Mr Kabiru responded that the four had no rights over the shares being bought by Co-op Bank, arguing theirs are new and not existing stock.

“Since the offer does not relate to the existing shareholders’ per se, the company is not obliged to share the terms of the offer or the transaction documents,” Mr Kabiru replied in the June 30 letter.

Mr Kabiru’s stance shows that the Jamii Bora deal will also be concluded with minimal involvement of its shareholders.

Besides the institutional investors, Jamii Bora has more than 600 retail shareholders.

At the July 1 “General Meeting” held to consider the buyout, shareholders controlling a combined 73 percent stake voted to approve the transaction.

They also gave the board of directors authority to take all actions necessary to conclude the deal, including amending the terms of the deal with Co-op Bank.

The current deal has already been changed from the earlier one announced in March when Co-op Bank was to buy a 100 percent stake in Jamii Bora.

The current Jamii Bora shareholders invested more than Sh2 billion in the bank and recouping their capital will take years even under the stewardship of Co-op Bank.

A source familiar with the matter told the Business Daily that the bank had the blessings of the Central Bank of Kenya (CBK) to pursue the rescue deal without paying too much attention to customary shareholder rights.

“The big issue here is that CBK wants Jamii Bora to be acquired,” the source said.

“For current shareholders, it is either the Co-op Bank deal or their investment goes to zero. The board is prioritising the buyout.”

Jamii Bora last reported a Sh51.2 million net loss and net assets of Sh3.4 billion in the quarter ended March 2018, with the suspension of results publications in subsequent quarters meant to avoid a run on the lender.

The source mentioned other distressed bank sales that were shepherded by the CBK, including those of Chase Bank and Imperial Bank, where normal shareholder communications and engagement were little observed.

The four investors also wanted to know the potential liability facing current shareholders should the information provided to Co-op Bank turn out to be false or misleading.

“The representations and warranties are yet to be fully set out. However, it is expected that they will relate to the issues arising from the transaction due diligence and will be created by the company and not the shareholders.”