Shares-for-debt swap raises State holding in Uchumi

The government has taken up an 11 per cent stake in Uchumi Supermarkets as the retail chain re-engineers its shareholding to cut its obligations to creditors.

This came after the government agreed to convert Sh350 million of a Sh757 million debt into shares, giving the state direct shareholding and therefore diluting the holding of the more than 12,000 shareholders.

The shareholders, at their annual general meeting last Friday, agreed to the plan that saw the government and suppliers convert their debt into shares as its bankers extended the repayment terms of loans owed to them.

The government loan was part of Sh875 million advanced to the retail chain in May, 2006, after its near collapse and was to be repaid once the company tapped a strategic equity partner.

Based on a recent valuation by audit firm KPMG that placed a share of the firm at Sh12, the entire loan could earn the government about 63 million shares or 24 per cent of Uchumi’s 262 million issued shares, which was an increase from 180 million shares after the shares for debt swap.

Its share price stood at Sh14.50 a piece before its suspension from trading on the Nairobi Stock Exchange (NSE) in mid 2006.

The government had no direct holding in Uchumi but was in a position to influence 26.5 per cent of the voting rights that are held by Industrial and Commercial Development Corporation and the Kenya Wines Agencies. The increase in government’s interest in the firm is a departure from the latest trend where the government has been selling its shares in hitherto State- owned companies to plug its widening budget deficit and boost efficiency in the firms that had been mismanaged.

Some of the high profile firms in which the government has sold part of its shares to private investors include Safaricom, KenGen, Kenya Reinsurance and Telkom Kenya. The government is planning to cede its holding in at least 26 firm,s including the Kenya Ports Authority, the National Bank of Kenya and Kenya Wines Agencies in the coming two years.

It is not clear whether the government would prefer to remain a shareholder in Uchumi Supermarkets in the long run or it will exit the firm once it’s re-admitted at the NSE. Though the retail chain has been on the recovery path since the entry of receiver managers in mid 2006, it had been unable to clear a debt of Sh757 million owed to the Government, Sh266 million to suppliers, Sh207 million to shareholders and Sh130 million to the bankers—KCB Bank and PTA Bank.

The firm posted a pre- tax profit of Sh170 million in the year to June 2009 on revenues of Sh8.2 billion compared to a loss of 1.2 billion in 2005, a signal that its turnaround strategy is bearing fruit albeit at a slower pace.

This debt mountain has delayed the resumption in the trading of the retail chain’s shares on the Nairobi Stock Exchange (NSE) following its suspension after being placed in the hands of receivers in mid-2006.Because of inability to trade shares at the Nairobi bourse, Uchumi’s 12, 000 shareholders missed out on massive returns that fellow investors reaped from the market at the peak of the stock market rally in 2007 that ended with the January 2008 post-election violence.

In 2000, a botched expansion plan saw the company’s fortunes begin to dwindle, leadng to its inability to meet financial obligations on an ongoing basis. This left it with an accumulated debt of more than Sh2 billion owed to suppliers and bankers, with a huge fraction of them having been paid in the past three years. The debts have also held back the chain’s growth plans, also making it difficult to source fresh debt and leaving it with reduced cash flow at a time when its main rivals— Tuskys Supermarket and Nakumatt — to race ahead in consolidating market share.

Second tier players such as Naivas and Ukwala supermarkets have also munched into what was Uchumi’s market share. The balance sheet restructuring is also aimed at shoring up Uchumi’s shareholder funds that had been eroded by periodic losses—which had accumulated to Sh2.4 billion in June, 2006.

The shareholder funds stood at negative Sh180 million from negative Sh731 million in 2006 are expected to move to the positive territory of Sh393 million after the conversion of the debentures into equity.

With a cleaner balance sheet, Uchumi Supermarket is now looking at sharpening by opening more stores and revamping its existing stores.