Jaindi Kisero
4 July 2009
Nairobi — The country's first supermarket chain, Uchumi Supermarkets, may be turned into a fully-fledged State parastatal if the government accepts a new proposal by the Ministry of Trade.
Confidential correspondence seen by the Sunday Nation shows that the ministry has approached the Treasury to convert a Sh875 million loan, which the government extended to the company three years ago, into shares.
Technically, what is being proposed makes a great deal of sense. But the inevitable consequence is that the stake of a good number of the 16,000 Uchumi shareholders who have been holding the shares for three years in the hope that they will one day trade them when the company returns to the Nairobi Stock Exchange risk being diluted almost to zero.
In May, 2006 when the company collapsed, the government released Sh675 million as part of a Sh 875 million loan to the company, on the understanding that the money would be repaid once the company identified a strategic equity partner.
According to the plan, a deadline for procuring a strategic equity partner was set for June 30, 2009.
Until last week, the assumption had been that the process of identifying a strategic partner was going on. The first signs that the rescue plan had been changed emerged on Thursday when Uchumi chief executive Jonathan Ciano announced at a press conference that the idea of a strategic equity partner had been dropped altogether.
It has now emerged that away from the public limelight, the company had dropped the strategic partner option and had been quietly lobbying the government to agree to the conversion of the loan into equity.
Evidence available to us shows that two weeks ago, as the deadline for procuring a strategic partner and consequently the commencement of the loan repayment approached, the Ministry of Trade fired off a letter to Treasury in which it admitted that it was not in a position to start repaying the Sh675 million loan.
The letter, signed by the Permanent Secretary for the Ministry of Trade, Dr Cyrus Njiru, on behalf of the task force overseeing Uchumi's turnaround, also disclosed that the company had neither managed to secure a strategic equity partner nor succeeded in convincing its shareholders to pump in additional capital to the company.
Dr Njiru said that despite the fact that the company has been able to turn in profits for two successive years, it remained technically insolvent.
He added that although the company had substantially succeeded to repay its loans to secured debenture holders, it still had a negative shareholders value of around Sh897 million as at May 2009.
On these grounds, the PS requested the Treasury to agree to a conversion of the whole of Sh875 million loan, part of which was already released to support the Uchumi rescue plan plus interest, into equity.
The ministry proposed that the conversion should be completed by December this year.
Dr Njiru also informed Treasury that the company's secured creditors, namely the Kenya Commercial Bank and PTA Bank, had also indicated that they will consider rescheduling their secured debts to support initiative to recapitalise the company.
How the company's shareholders will react to these revelations remains to be seen.
Matters are likely to come to a head at a crucial shareholders meeting that has been called by Mr Ciano, where the company will be asking the shareholders to contribute Sh400 million of fresh equity.
So far, Mr Ciano has kept the issue of converting government debt into equity under wraps.
During a press conference on Thursday, at which he announced the forthcoming shareholders meeting, the CEO made no mention of the fact that the government had been approached to convert its loan and interest into equity.
There may be a political backlash as it begins to sink to the shareholders that what is proposed effectively amounts to transferring Uchumi ownership from the small shareholders to the State.
In a conversation with the Sunday Nation, Mr Ciano was less than forthright on the matter, denying any knowledge of the fact that Treasury had been approached over the loan.
"We will only approach that route as a fall-back. We have not made such a proposal to the government yet," he said.
Whichever way one looks at it, Mr Ciano will be going to the shareholders meeting in a very strong bargaining position: he can easily give the shareholders a take-it-or leave-it ultimatum; tell them to put in more money in the company or have their shares diluted.
Twice before, Uchumi's shareholders have shown reluctance to put in more money into the company. But this time round, they are likely to find themselves in a weak bargaining position.
Asked whether he was holding a gun on the heads of the shareholders, Mr Ciano argued that offering the shares to other parties will be a last option.
He said he expected a great deal of support from the shareholders because the company had turned around and most of the shareholders were upbeat about its fortunes.
Uchumi is one of the leading supermarket chains with a foot print in most major urban centres in Kenya.
It operates a successful subsidiary in Kampala. The company was launched in 1975 and remained successful through the years leading to its listing on the Nairobi Stock Exchange in 1992.
Beginning the year 2000, a poorly planned expansion plan saw the company's fortunes begin to dwindle, culminating in its inability to meet financial obligations on an ongoing basis.
An initial restructuring package between 2002 and 2005 that included a rights issue failed to forestall the deteriorating performance of the company.
Following a resignations of a number of directors and major changes in the top management and losses totalling Sh2.8 billion, the directors decided to approach creditors to put the company under receivership in June, 2006.
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