Kenya: Uchumi Turns to Shareholders One Last Chance

Nairobi — A year after the near-collapse of Uchumi Supermarkets, attention is focused on the latest manoeuverings in the tortuous recovery strategy.

The company's receiver-managers are offering reluctant shareholders one last chance to inject Sh600 million into the company under a recapitalisation plan. If that fails, the retail chain must find a new equity partner to fund the recovery.

Uchumi Supermarkets receiver-manager Mr Jonathan Ciano, last week announced an effort to get shareholders to participate in a Sh800 million recapitalisation programme. Picture by Jenipher Wachie

However, given the dodgy dealings before the stock was suspended from trading at the Nairobi Stock Exchange a year ago, getting more money from shareholders is proving a hard sell indeed.

Fresh details of the dramatic last two weeks of trading in Uchumi shares continue to emerge.

Capital Markets Authority investigations have involved the questioning of several stockbrokers and investors.

Former Kenya Commercial Bank chief executive, Mr Terry Davidson, is one of the key personalities questioned. He was put on the spot by the market regulators after investigations revealed he sold 300,000 Uchumi shares in the days before the company was put into receivership.

Davidson's position on the sale has been tricky since it was KCB, jointly with PTA Bank, that moved in to take control of Uchumi after the board threw in the towel.

When contacted by FS, Davidson confirmed that he actually sold the 300,000 shares in the final days of Uchumi's trading. However, he denied that the transaction was due to prior knowledge of the impending closure of Uchumi.

"I initiated the transaction long before any major decision was made," he says. "It was purely coincidental that the transaction was completed in the final day of Uchumi's trading."

Davidson told FS that he had instructed Suntra Stocks to sell 500,000 shares on May 9 last year: 300,000 Uchumi shares and 200,000 KCB shares. He added that the Uchumi transaction delayed due to a technical problem with one of his bankers.

"As a result, the deal just was just concluded just hours before the announcement," he added.

Davidson says that as the CEO of a major Uchumi creditor, he had no idea that the board planned to throw in the towel.

"We were just as surprised as anyone else when we heard the announcement," he says.

Massive insider trading

A look at trading last May shows investors dumped huge amounts of Uchumi shares in the final two weeks. For instance, on Friday May 13 the trading price was Sh14.40 and 140 shares sold. But opening of trading the following week saw suspicious heavy trading.

By Wednesday 18th May 273,450 shares had been sold to unsuspecting investors. Thursday and Friday of that week saw low trading with about 10,000 shares traded in the two days at Sh14.50.

However, the bombshell came on Monday May 23 when in a single investor dumped over 500,000 shares at Sh14.50. That Monday 513,675 shares of Uchumi were traded. In the final three days of trading May 27, May 30 and May 31 another 317,756 shares were sold. The trading average in the previous month was just around 10,000 shares per day.

Many shareholders cried foul, saying their stockbrokers advised them to invest heavily in Uchumi. Mrs Mary Njoroge told FS that she invested slightly over Sh1 million in Uchumi in the last week of trading.

"I was advised to put in that sum since the prices were expected to hit the Sh24 mark in June or July," she says. Njoroge adds that her broker hinted that the Government was expected "to pump in a good amount of money" after the Budget speech in June.

No report

The closure of Uchumi came as a result of a board disagreement on the way forward in raising Sh500 million from the market through private placement. A section of the board felt that the money that had been raised through a rights issue appeared to have had no impact on the status of the company.

The board disagreement led to a series of critical meetings between Uchumi and the major creditors, Kenya Commercial Bank and PTA Bank between May 10 and 25. It is during this time of stormy meetings that heavy transactions of Uchumi shares took place.

Apart from the CMA Investigations, the Institute of Certified Public Accountants of Kenya (ICPAK) have also been conducting their investigations.

ICPAK announced last year that they had commenced investigations to establish whether any of its members involved in the 2005 rights issue, the management of the company and provision of accountancy services played their roles in full compliance of the required professional standards. To date neither the CMA or ICPAK investigations have yielded a detailed report.

Riding on good reputation

Last week, receiver-manager Mr Jonathan Ciano, announced an effort to get shareholders to participate in a Sh800 million recapitalisation programme. Should that fail, he said, Uchumi will have to get a strategic partner. Two local consortia are believed to be jockeying for this role.

Ciano told the FS that the two aspects of the recovery plan will be given to shareholders at a meeting that has been called for the last day of this month in Nairobi. He said that other than using the meeting to launch the Uchumi Rescue Plan and Performance Brief, it will be the last opportunity for the shareholders to play their bit in changing the supermarket's fortunes.

"It will involve asking shareholders the way forward because our ultimate goal is to be admitted back to the stock market," Ciano said in an interview with the FS. "We have built a road map which we want to share with the shareholders."

Ciano says that over the last one year, the company has worked on ways it could ride on the reputation it still commands among Kenyans.

Other than raising the additional funding, shareholders are expected to give their vote on a new business plan that will see the firm adopt a global retail business and marketing strategy.

New business strategy

An approval by shareholders will allow the company to adopt a similar business strategy to Nakumatt Supermarkets, which is its key competitor. The business strategy involves the use of leasing as a way of growing the business. Under the leasing arrangement, Uchumi Supermarkets will enter into a series of agreements with property owners in Kenya that will allow it to get a foothold of new locations.

"This means that we shall open and maintain the branches that have passed the business test," Ciano said. So far three branches have been closed permanently after they failed to justify their presence in the company.

The new business outlook is expected to provide a boost to the real estate market because according to Ciano, Uchumi wants to grow the business into new areas and locations. Particularly, the retail chain wants to take advantage of an increase in the consumer's purchasing powers and the growth of key sectors such as agriculture and tourism and actualise its come-back plan.

The retail chain's return is hinged on five pillars that are led by revival, survival, synergy, profit and growth. A look at the company's report card indicates that the revival has been secured after the government injected Sh670 million.

Revival successful

The company has also been able to keep debtors at bay by paying off 50 per cent of the Sh800 million worth of debts primarily to suppliers, Kenya Commercial bank (KCB) and the PTA Bank. As the supermarkets plots its final push out of receivership, Ciano says that available figures indicate that all the branches have started returning into profitability which is a break from the past when the Uganda operations is said to have been contributing upto 40 per cent of the entire group's bottom-line.

"Most of the branches are now able to report positive cash," he said. "We are now heading into profits and you will be surprised as to how much we have done because it is far much better than before."

The firm was forced to close its doors after another recovery strategy failed to pay-off.

At the time, the process was being driven by the then Chief Executive Officer and group managing director, Mr John Masterten-Smith, who announced that the firm had failed to recover five years after reporting losses running into billions of shillings and the collapse of its traditional market share within the retail market.

"The board is of the view that the business is facing insolvency and it is only prudent that necessary action is taken to stem further losses," Smith told a hurriedly convened media briefing at the company's head offices in Nairobi Industrial Area at the time.

He said that Uchumi's board and management had initiated "structured but painstaking initiatives" to address the company's financial standing. The steps included cutting costs, disposal of non-strategic assets, raising additional capital, optimising its service delivery and inventory.

However, after that strategy failed, Masterten-Smith was forced to raise the white flag, insisting that the company had been forced to seek insolvency.

Among others, the turnaround strategy wanted to reduce the inventory holding period for each store to less than 30-days of sales, closure of loss making and poorly located branches and injection of fresh capital.

The Uchumi board had also secured the consent of the company's lenders to dispose of land, buildings, and other non-core assets from which it expected to realise more than Sh900 million.

God prospects

According to Ciano, shareholders had not understood the gravity of the problem at their beloved company. He, however, says that based on the firm's performance over the past one year, he hopes to convince shareholders that the turnaround strategy would work this time round.

"That first turnaround strategy was poorly timed because several other companies also raising funds through rights issues, which were direct competition to us," he says.

Ciano says that other than supporting the adoption of a new business strategy, shareholders will have to support the payment of the third tranche of Sh220 million to the debenture-holders. Shareholders will also provide the direction in the restructuring of the company's balance sheet.

Highly placed sources told FS that the Uchumi shares are likely to start trading by July this year. According to the source, the direction taken by shareholders will determine the speed of re-listing.

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