31 October 2011

Kenya: Twists and Turns May Drive CMC Out of Business

The future of one of Kenya's largest motor dealers will be known this week. It will usher in phase two of a vicious boardroom war at CMC, where two camps are fighting for control of the Sh7.8 billion car firm.

It will mainly be dependent on how the High Court rules on an application seeking to bar the Capital Markets Authority (CMA) from interfering with an extraordinary general meeting scheduled for November 21 at the Bomas of Kenya, Nairobi.

If it okays the meeting, that will be a big boost to the group led by Mr Peter Muthoka, the single largest shareholder of the firm (about 24.7 per cent) and until a month ago the largest service provider to CMC through Andy Forwarders, who are trying to make a return to the company after losing control to the group led by Mr William Lay, the current chief executive.

By calling for the extraordinary AGM, whose sole purpose is to oust four of the current directors, Mr Muthoka seems to have done his arithmetic well to know that he has the numbers to cause a coup at Bomas.

And should the court rule that CMA has a right to exercise its regulatory role, which would include cancelling the November 21 meeting and thus giving the current management more time to complete investigations on the company's past transactions, the process will witness a long drawn-out battle for control.

CMA has indicated that it prefers to retain the status quo to allow investigations to be complete.

Mr Muthoka is said to have been making at least Sh500 million annually from CMC by offering shipment and other logistic services through Andy Forwarders. The new management has since cancelled the contract.

Mr Lay is the face of the new group, led by chairman Joe Kibe and Mr Paul Wanderi. The two have a combined stake of about 18.72 per cent, held individually and through their companies: Rift Valley Finance Services and Mobicom.

The group argues that Andy Forwarders has been overcharging for its services by between 10 and 100 per cent, bleeding the company by over Sh500 million annually.

"... following the termination of the Andy contract, the company is saving approximately Sh40 million a month in reduced logistics charges," Mr Lay says in a letter sent to shareholders last week giving the reasons the management is opposed to the November 21 meeting.

The current scenario, where the next cause of action depends on court orders, is a setback to the Muthoka team, whose plan for a bloodless coup suffered a major setback on Friday when a ruling which would have secured the November 21 meeting was withdrawn.

After issuing a notice calling for the extraordinary AGM, which they said was for the sole purpose of having Mr Lay, Mr Wanderi, Mr Kibe and Mr Andrew Hamilton removed as directors, Mr Muthoka moved to court on Thursday to secure the date by ensuring that CMA was barred from interfering with the November 21 meeting.

Being a public-listed company, CMA has regulatory power over the conduct of the car dealer's affairs. The powers include cancellation of the proposed meeting.

It is the latter that the Muthoka team wanted the High Court to forestall. He got the order but that was shortlived as on Friday the judge vacated the order as it turned out that he was a close relative of the lawyer representing Mr Muthoka.

Accused of conflict of interest and breach of natural justice, Justice David Majanja ordered that the application be heard afresh before another judge.

In opposing the order and the holding of the extra ordinary meeting, CMA says the meeting bears the risk of having "the directors of the company who have accused the petitioner (Mr Muthoka) of fraud" removed from office, "thus hampering on-going investigations."

In a notice calling for the extraordinary AGM, Mr Muthoka blames the current team of mismanagement of the company.

He says the new order, led by Mr Lay, has since taking over in May mismanaged the company, resulting in the issuing of two profit warnings for the second consecutive year, which is unprecedented in over 47 years of the firm's existence.

Mr Lay is also accused of hiring a commission agent on a five-year contract to earn a commission on sales (six per cent of gross sales) of all CMC products without competitive sourcing or approval of the board. This will make the company lose in excess of Sh635 million per year, he says.

Mr Lay was also accused of pushing to transfer the business from the CMC Motors premises in Industrial Area, Nairobi, to Sameer Business Park.

According to Mr Muthoka, this move was championed by the current group managing director and some directors without prior approval of the board.

It would reportedly make CMC spend in excess of Sh250 million annually.

"Mr Lay unilaterally and without board approval decided to reverse salary increases of 69 managers of the company... (this) is not only unacceptable but illegal," the notice says.

The company is also fighting for its survival after its profits halved to Sh406 million last year, resulting in the resignation of long-serving chief executive Martin Forster.

It is his exit, which he blamed on Mr Muthoka, that triggered the wave that has resulted in the current scenario.

In what is seen as venting to the current management Mr Forster says his exit had a lot to do with his questioning of invoices send by Andy Forwarders.

"I discovered a substantial price difference recently amounting to almost double the going rates. Any action on my part to recover several years of overcharge was cut short by my untimely dismissal from my beloved CMC," he said.

Formed in 1948 to supply Land Rovers to the colonial government, CMC never outgrew the vision of its founders. It has always maintained a close relation with the government of the day to ensure business continuity through State tenders.

This partly explains why provincial administration office vehicles and those of the police were until recently Land Rovers.

The supply was only interrupted when the Kibaki government took over in 2002 and made a switch to Toyota.

Finance minister Uhuru Kenyatta was to hand back the business to CMC when he announced a new policy where all government officials were required to give up their Mercedes Benz cars in favour of Volkswagen Passats.

CMC is the exclusive supplier of Volkswagen car models in Kenya.

Copyright © 2011 The Nation. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 2,000 reports a day from more than 130 news organizations and over 200 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.