Express Kenya #ticker:XPRS chief executive Hector Diniz’s planned buyout of the company could leave him with Sh772 million in paper profit, the latest estimates of the firm’s worth shows —pointing to the excess and hidden value in its land and buildings.
Mr Diniz, who owns a 61.64 per cent stake in the Nairobi Securities Exchange-listed company, has offered to buy the remaining 38.36 per cent equity at a price of Sh5.5 per share or a total of Sh74.7 million.
It has emerged that the offer did not factor in the current market value of the company’s 15.7 acres in Nairobi’s Industrial Area on which it plans to build 248 apartments following the collapse of its logistics business.
A 2014 valuation of the property seen by the Business Daily placed the property’s market value at Sh1.2 billion, and land valuers said it could be worth much more given the rate at which the cost of land has been appreciating in recent years.
Express Kenya had total liabilities of Sh427.1 million as of December 2017, indicating that a paper profit of Sh772 million will accrue to Mr Diniz if the buyout is successful and he is left with the land. Most of the liabilities are loans from entities controlled by or associated with Mr Diniz.
The firm’s latest published accounts place the value of the land and other fixed assets at a paltry Sh262.9 million, which its chairman Chris Obura insists is the true reflection of their worth.
“Whatever value is there is the current value,” Dr Obura said, adding that the value of the land has been going down partly due to depreciation. Dr Obura’s position, taken alongside the reported value, means the land’s worth has fallen by more than 80 per cent in three years at a time when prime industrial and residential property prices have been rising fast.
Faida Investment Bank, the independent financial adviser hired by Express Kenya board to guide the buyout, also found the company to be worth more than what Mr Diniz has offered.
The investment bank said Express Kenya has a value per share of between Sh14.51 and Sh16.15 —more than double Mr Diniz’s offer of Sh5.5 — based on what the company’s assets would fetch on liquidation.
Faida nevertheless endorsed the CEO’s buyout price, saying it takes into account his choice of maintaining the company’s operations and the attendant losses he will absorb in the medium term as he seeks to turn the operation around.
“On an asset liquidation valuation basis, the fair value of the business should range between Sh14.51 and Sh16.15,” Faida said in its report.
“However, based on the information provided to us, Diniz Holdings does not intend to liquidate the company and will continue to carry out the current business of Express Kenya. If this is the case, then the price of Sh5.5 per share is fair and reasonable.”
That is the same argument Faida used in endorsing Seaboard’s offer of Sh40 to shareholders of Unga Group #ticker:UNGA, arguing that the multinational need not pay the higher liquidation value of Sh67.19 since it will continue running the business.
The abandonment of asset values in buyouts, if it becomes pervasive, will tilt the scales in favour of acquirers who will seek to pay some premium on depressed share prices.
Mr Diniz acquired his Express Kenya stake in 2003 when he bought out South Africa’s Viamax Pty Limited and Switzerland’s Kuehne & Nagel International AG. The executive says he will invest nearly Sh500 million in the company in the short term, including retiring loans owed to his other companies.
“The proposed acquisition of the offer shares by Diniz Holdings will allow Diniz Holdings the time and space to restructure the business and bring it back to profitability without burdening the minority investors,” Diniz said in the offer document.
“The restructuring will include paying off approximately Sh350 million worth of loans, claims and creditors of Express Kenya. The acquisition will also cost Diniz Holdings an additional Sh140 million to ensure the transaction is fully and seamlessly effected.”
Express Kenya’s outstanding liabilities include Mr Diniz’s pay of Sh30.2 million and a loan of Sh74.1 million from Diniz Holdings. The company says its real estate development has stalled after failure to get bank financing.