15 February 2010

East Africa: Inside the Hostile Takeover of RVR

Nairobi — Transcentury, the influential Kenyan investment group, has proposed to the governments of Kenya and Uganda to exclude Sheltam Railway Company from further participating in restructuring the troubled railway concession.

Fronted by its South African owner Roy Puffet, Sheltam Railway Company is the majority shareholder of Rift Valley Railways (RVR). It is also the lead investor that won the concession of the railway system in Kenya and Uganda.

After Mr Puffet sold 49 per cent of the company to the Egyptian private equity fund, Citadel Capital, Transcentury's appeal is a bid to block the Egyptians from controlling the concession.

Transcentury chairman James Gachui wrote to permanent secretaries in the ministries of transport in Kenya and Uganda - Dr Cyrus Njiru and Grace Itazi - with what he termed as a way out of the current shareholding deadlock that has blocked the attempt by the two governments to restructure the poorly performing concession.

"We humbly believe that a way forward must be found that excludes Roy Puffet and Sheltam from further negotiations," says Mr Gachui. Mr Puffet has become a political liability to the concession after the Daily Nation revealed controversial goings-on at RVR.

The views of the remaining five shareholders of RVR are diametrically opposed to Transcentury's. In a letter signed by the executive chairman of the company, Mr Brown Ondego, the shareholders gave the government three options. These include a suggestion that Sheltam - now under the control of the Egyptians - be allowed to continue as lead investors as long they meet their financial obligations under the concession.

Basically, Mr Ondego and the majority of the shareholders want an arrangement that does not require unanimity and where any shareholder ready to pump in cash can continue being in control.

The majority of the shareholders are for a structure in which Citadel will have control. A stand-off between Transcentury and the rest of the shareholders has literally blocked all attempts to restructure the company. The EastAfrican has also learnt that Helios Capital of the UK has entered into the fray with a new offer to the governments of Kenya and Uganda.

In a letter signed by managing partner Babatunde Soyoye, dated February 3, Helios said it was interested in rapidly providing $50 million of investment capital to RVR. But the offer is conditional: They can come in only in partnership with Transcentury - where Transcentury takes control as the anchor shareholder.

The government has appointed a technical committee to look at the two proposals. What is playing out right now is a battle pitting the strong against the strong: on one corner the politically-influential Transcentury and on the other Citadel Capital of Egypt.

In the supporting cast are five shareholders who have all ganged up to oppose Transcentury, namely Sheltam of South Africa (35 per cent), Prime Fuels of Kenya (15 per cent), Tanzania's Mirambo (10 per cent), Australia's Babcock&Brown (10 per cent) and Centum (10 per cent).Transcentury's stake in the company is 20 per cent.

Recently, Transcentury moved the dispute to a new battleground - a court in Mauritius. It sought ex-parte orders to stop the other shareholders from raising $10 million of fresh capital in a rights issue. RVR is registered in Mauritius. The documents filed by Transcentury in Mauritius - seen by The EastAfrican - provide a rare glimpse of the intensity of the conflict between the shareholders.

Away from the limelight, Transcentury has been suspecting that the five shareholders who have ganged up against it have clandestinely sold their shares to the wealthy Egyptians. In the court documents, Transcentury says several letters it wrote to shareholders to clarify whether they had sold the shares to third parties had not been replied to.

It says the situation started looking even more suspicious when it realised that the letters responding to its queries from all the five shareholders were identical in wording and content. Transcentury has asked the High Court in Mauritius to stop the shareholders from pumping in any new money into RVR through a rights issue for two main reasons.

First, that the governments of Kenya and Uganda could terminate the concession on the grounds that they did not approve the purchase of shares of 49 per cent of Sheltam by Citadel Capital. Second, that the deal between Sheltam and Citadel did not have the consent of the two international financial institutions supporting the transaction - namely, IFC and KFW of Germany.

Still, the tactical move by Transcentury to move to court was confounding. Its intention, in hindsight, was to ambush the parties. The court papers were sent to Mauritius by email on January 27, 2010.

This was two days before the deadline for the rights issue and the same day all key decision makers on the matter were meeting in Kampala under the inter ministerial committee dealing with the matter - the Joint Railway Commission.

Subsequent to the filing of the case in Mauritius, and with the courts having refused to grant ex parte orders, Transcentury found itself in a dilemma: if it didn't put in its share of capital in the rights issue by the deadline, it would lose out. The capital injection made last week is estimated at $10 million.

A number of shareholders are said to have knocked off what they were supposed to fork out against old shareholder loans they had extended to the company. But what is documented is that on February 3, 2009, RVR paid to Kenya Railways Corporation the outstanding concession fee and rent amounting to $2 million.

Similarly, the Uganda Railway Commission has been paid $1 million in respect of which termination notices had been issued. Under the rights issue, the shareholders must put in another $10 million by March 10, 2010.

It now remains to be seen how the battle between Transcentury and Citadel Capital will ensue. But having paid the financial defaults under the concession agreement, the two governments will have fewer levers against the shareholders, short of re-nationalising the railway network and facing the legal consequences.

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