Business Daily (Nairobi)
Washington Gikunju
23 November 2009
Retail chain Nakumatt Supermarket is shoring up its financial position with the sale of a third of its shares to international private equity investors for Sh1.8 billion.
The sale comes at a critical moment for Kenya's leading retail chain, whose finances have been significantly eroded in recent months, as the economic downturn ate into consumer market power reducing purchase volumes in every shopper's basket by an estimated average of 25 per cent.
Atul Shah, the group managing director said Nakumatt, is selling between 30 and 33 per cent ownership for $25 million and is backing that up with a Sh4 billion medium term syndicated loan from four local banks.
The sale price puts Nakumatt's total worth at about $75 million or Sh5.4 billion a more than 25 per cent erosion of the company's value in 2007 when research analysts at Nielsen estimated the retail chain to have been worth Sh7 billion.
The double pronged effort should see Nakumatt secure a total of Sh5.8 billion that Mr Shah says will mainly go into financing the regional expansion project as well as re-engineer stocking and displays in its stores to shore up sales volumes during the expected recovery next year.
Mr Shah declined to reveal the identity of the parties involved in the deal citing confidentiality agreements signed with the potential buyers.
He however indicated that one of the private equity firms is based in the UK while the other operates from the Middle East.
Both have invested in healthcare, telecommunications and banking in four other African countries.
Kingdom Holding Company (KHC) -- an investment group that is associated with the Saudi royal family - has constantly featured as one of the potential buyers of Nakumatt.
It is not yet clear whether only one or both private equity firms in the race for a stake in what is widely viewed as Kenya's premier retail shopping facility will be accommodated in the final pact to be signed before year end.
"Due diligence by both parties is ongoing but we expect to finalise everything by end of next month," said Mr Shah "There is the possibility that we could end up with a tri-party agreement."
Nakumatt is currently majority owned by the Atul Shah family and Hotnet Ltd, a company associated with the Kilome Member of Parliament Harun Mwau.
The impending sale is however seen as offering Mr Mwau an opportunity to exit the business leaving his seat in the board to the new partners.
"The minority may want to exit but a final decision has not been reached," said Mr Shah.
Nakumatt's hunt for an equity partner began early this year as the retail chain's cash flow came under immense pressure from a string of misfortunes and a weakening of the economy that greatly reduced consumer purchasing power.
The retail chain has taken a double blow in the past 12 months following the demolition of its Thika Road branch late last year and the outbreak of a fire tragedy in its downtown outlet said to have been its best performing outlet.
Two stores
The two stores moved Sh240 million on average in monthly sales revenues out of an estimated total monthly turnover of about Sh2.4 billion.
The retailer also suffered a major jolt in 2006 after the Central Bank of Kenya put one of its bankers, Charterhouse Bank, under statutory management.
A strong economy and the crisis at its main rival Uchumi which has since regained its muscle in the sector, however, gave Nakumatt the space it needed to grow into Kenya's leading supermarket.
Since 2006, Nakumatt has been executing a branch 'modernisation' plan that has positioned its stores in the top end of the retail market, targeting the rich with a wide range of electronic goods, furniture and other lifestyle products.
Nakumatt also became the first Kenyan supermarket to offer 24-hour shopping outlets, and the first to enter the Rwanda market where it spent Sh240 million ($3 million) to establish the Kigali branch.
The retail chain's total branch count currently stands at 22, including the Uganda and Rwanda outlets.
The expansion was mainly financed through short term debt notes and money from the chain's bankers.
Mr Shah told the Business Daily in July that Nakumatt's debt level stood at 1.8 times the value of equity in its capital structure, implying that the chain had liabilities in its books that were nearly twice the shareholders' capital in its balance sheet.
Last year's sharp economic downturn, which was characterised by an annual average inflation rate of 26 per cent slowed down consumption throwing the retail chain's growth estimates off the track.
The supermarket had projected a sales growth of up to 10 per cent at a time when bank loans became more costly and less available.
"We have reached a stage where our capital requirements can only be financed through equity, borrowing does not make sense any more," said Mr Shah.
But with the new war chest now as good as locked in Nakumatt's coffers, the management plans to renew earlier plans to open up to 10 new outlets that should raise its total branch network in Kenya to 30 by 2012.
The chain also hopes to open four stores in Tanzania, three in Uganda, and one more in Rwanda.
"Three new branches will open in Kenya before the end of the year, there is construction going on in Dar es Salaam and Moshi (Tanzania)," said Mr Shah.
In Kenya, Nakumatt plans to open new outlets in Mombasa's Diani, Nanyuki, Kakamega, and Eldoret.
He however maintains that the opening of new stores outside Nairobi does not signal a shift in the chain's strategy of serving the up-market clientele.
"Our key strategy remains one of taking care of the uptown," he said.
Nakumatt remains Kenya's leading retail chain by sales revenues - according to references in rival Uchumi Supermarket's five-year confidential business seen by Business Daily.
Nakumatt remains a privately owned firm that is not obligated to make public its financial statements.
Two years ago, Nakumatt announced plans to float shares at the Nairobi Stock Exchange (NSE), but later shelved it after the stock market set on a bear run that has persisted to date.
With the new equity investors expected to remain in the firm for seven years, it remains to be seen whether they may synchronise the listing process with their exit to facilitate a smooth transition.
Balance sheet
"Equity investors are known to prefer exiting through the stock market but any listing plans will depend on how Nakumatt's balance sheet will look in the coming years," said a Nairobi based financial analyst who also consults for Nakumatt.
Robert Bunyi, financial consultant at Mavuno Capital had told Business Daily in an earlier interview that a Nakumatt bid to tap capital from the equities market could probably pay off given its strength as a leading retail chain.
Mr Shah said the business made an estimated profit of between Sh250 million to Sh300 million as per last year's un-audited accounts.
Supermarkets are thought to account for about a third of the total retail space in Kenya, according to details in the Uchumi strategic plan, which ranks Tuskys Supermarkets as the number two brand in the pecking order.
Other players in the highly competitive field are listed as Ukwala, Chandarana, Stagematt and Woolmatt.
Uchumi has been on a recovery path in the last three years after being placed under receivership in 2006 owing to what was seen as a botched expansion plan.
Though profitable now, Uchumi is still technically insolvent and is in the process of raising debt capital (debentures) from its shareholders to clear off its debts and return to trading at the NSE.
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