Troubled regional retail chain Nakumatt's proposed merger with rival Tuskys Supermarkets was Monday facing a major regulatory hurdle after it emerged that the two top retailers had not sought the competition watchdog's approval as required by law.
Nakumatt, which is Kenya's largest retail chain by number of outlets and Tuskys, the second largest, are yet to make public financial details of the proposed merger that was announced yesterday.
"It is a merger," Nakumatt managing director Atul Shah told Reuters. Mr Shah, however, declined to disclose any details of the deal.
If approved, the merger would create one of the largest supermarket chains in East Africa.
That prospect means it has to go through a rigorous interrogation by the competition authorities, who must determine the possible impact of market power concentration on consumers.
Under Kenyan law, the Competition Authority of Kenya (CAK) must approve any undertaking with a minimum combined turnover or assets of Ksh1 billion ($9.7m) and Ksh100 million ($967,586) turnover in the target undertaking.
The Competition Authority of Kenya said it was not aware of the said merger. "(We have) not (received an application for such a merger)," said CAK director-general Wang'ombe Kariuki.
At the peak of its success, Nakumatt grossed an estimated Ksh70 billion ($677m) in revenues a year. The 27-year-old Tuskys on the other hand reported sales worth Ksh40 billion ($387m) in 2014.
Tuskys has 54 stores in Kenya, having recently closed one in Nairobi.
Nakumatt, on the other hand, has a larger regional presence with a total of 62 outlets across East Africa, despite recent closures.
Trade principal secretary Chris Kiptoo, while welcoming the deal, said the competition watchdog must determine the extent to which the proposed merger will create an unhealthy dominance in the retail market.
"We hope that the deal will eventually result in Nakumatt getting back to its feet given that it is one of Kenya's leading supermarket brands," said Mr Kiptoo.
"I expect the two retail chains to submit their agreement to the Competition Authority. If it meets regulatory compliance requirements as per the Competition Authority Act, then it is okay."
Clash with CAK
Tuskys is not a stranger to run-ins with the regulator over past mergers it has executed.
In September 2014, the competition watchdog initially stopped the retail chain's bid to take over six Ukwala Supermarkets stores, citing dominance concerns.
The competition watchdog had found, in a landmark case, that an unconditional buyout of the outlets would result in Tuskys' market dominance and reduce competition in Nairobi's retail sector, ultimately reducing choice and negatively impacting both consumers and suppliers.
The two retailers were then effectively ordered to terminate and roll back the acquisition of Ukwala's Tom Mboya and Ronald Ngala branches in Nairobi or risk criminal prosecution.
A merger with Tuskys is, however, critical to getting the heavily indebted and embattled Nakumatt out of distress, normalise its operations and address the stock-out problems that have dogged it in recent months.
Piling debt has aggravated Nakumatt's financial position as key suppliers have withheld stock and workers have gone for months without pay.
It is a ray of hope for Nakumatt whose failure to attract a deep-pocketed investor had left its owners with two tough options - to liquidate the business or significantly restructure its operations to keep it afloat.
Nakumatt had earlier this year set the cost of a 25 per cent stake it had put up for sale at Ksh7.7 billion ($74.5m), potentially valuing the entire business at about Ksh30.8 billion ($298m).
It has also been seeking approval to sell a 51 per cent stake in its Tanzanian unit to Ascent Investment Ltd as it follows through the plan to retire its debt load.
Shoppers in Nakumatt's outlets have in recent weeks taken to social media to complain of empty shelves and the absence of certain popular brands in various outlets as suppliers withdraw services until their bills are settled.