@StandardMedia

How British fund shot itself in the foot in Sh14b ARM venture

1 months ago, 23 Sep 00:20

By: Otiato Guguyu

A development finance institution owned by the UK government through the Department for International Development was scouting for cement firms in Sub Saharan Africa when they came across Athi River Mining (ARM) in Kenya.

ARM had positioned itself for the regional market with a strategic clinker outfit in Tanga that would give the company leverage to sell raw materials in Kenya and the East Africa region including Rwanda, Burundi and the Democratic Republic of Congo.

“Tanga is a strategic investment 606km from Athi River which is where all the grinding plants are. It is 380 kilometres from Dar es Salaam where our other plant is and it is 178 kilometres from Mombasa market. Tanga itself has its own market which can supply the lake zone to the central part of Tanzania,” said then ARM Managing Director Pradeep Paunrana.

“In this business, in the long term you can make a good margin if you are a clinker producer. We have already made that investment,” he said.

The capacity of Tanga is 1.2 million tonnes of clinker. Kenya and Uganda between them imported 2.7 million tonnes of clinker in 2017 while Tanzania has banned clinker imports, giving it massive potential.

Thus, Commonwealth Development Corporation (CDC) decided to buy a 42 per cent stake in ARM in April 2016 for Sh14 billion when the company’s shares were trading at Sh37, with a market capitalisation of Sh35 billion.

What followed was strategic missteps, boardroom wrangles and unprecedented policy challenges that hit the Tanzanian business and sent ARM into administration just two years later.

In a steep descent, the share price hit a one-year low of Sh2.40 and was later suspended from trading at Sh5.50, with the firm’s market capitalisation of Sh5.3 billion putting the CDC investment at about Sh2.2 billion.

In April 2018, the plan was to spend Sh11 billion to restructure debts and invest Sh3 billion in the business in capital expenditure, especially at the Tanga plant so that returns would flow back into the business.

CDC had even identified Kitui County as a potential location for a new plant as well as pursuing its interests in Ethiopia and Rwanda.

However, by October when the money came in, things changed.

CDC wanted to change the terms of a six-year convertible note from Nigeria’s Africa Finance Corporation (AFC) which would translate to about 13.2 per cent equity and thus water down the CDC stake.

“CDC felt the 13.2 per cent was not good for their shareholders as it was akin to free equity so they asked AFC to give up their rights,” Mr Paunrana told Weekend Business.

At the time, the AFC facility was Sh5 billion but jumped to Sh6 billion on penalties. So Sh2 billion of the CDC funds first went to AFC, leaving Sh12 billion.

“Whilst our debt was reduced by Sh14 billion from new share issue to CDC Group in September 2016, we began the last quarter of 2016 with a net debt of Sh25.5 billion. In the three months to December 2016, the net debt had decreased by Sh12.3 billion,” the firm said in its ...
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@StandardMedia

How British fund shot itself in the foot in Sh14b ARM venture

1 months ago, 23 Sep 00:20

By: Otiato Guguyu

A development finance institution owned by the UK government through the Department for International Development was scouting for cement firms in Sub Saharan Africa when they came across Athi River Mining (ARM) in Kenya.

ARM had positioned itself for the regional market with a strategic clinker outfit in Tanga that would give the company leverage to sell raw materials in Kenya and the East Africa region including Rwanda, Burundi and the Democratic Republic of Congo.

“Tanga is a strategic investment 606km from Athi River which is where all the grinding plants are. It is 380 kilometres from Dar es Salaam where our other plant is and it is 178 kilometres from Mombasa market. Tanga itself has its own market which can supply the lake zone to the central part of Tanzania,” said then ARM Managing Director Pradeep Paunrana.

“In this business, in the long term you can make a good margin if you are a clinker producer. We have already made that investment,” he said.

The capacity of Tanga is 1.2 million tonnes of clinker. Kenya and Uganda between them imported 2.7 million tonnes of clinker in 2017 while Tanzania has banned clinker imports, giving it massive potential.

Thus, Commonwealth Development Corporation (CDC) decided to buy a 42 per cent stake in ARM in April 2016 for Sh14 billion when the company’s shares were trading at Sh37, with a market capitalisation of Sh35 billion.

What followed was strategic missteps, boardroom wrangles and unprecedented policy challenges that hit the Tanzanian business and sent ARM into administration just two years later.

In a steep descent, the share price hit a one-year low of Sh2.40 and was later suspended from trading at Sh5.50, with the firm’s market capitalisation of Sh5.3 billion putting the CDC investment at about Sh2.2 billion.

In April 2018, the plan was to spend Sh11 billion to restructure debts and invest Sh3 billion in the business in capital expenditure, especially at the Tanga plant so that returns would flow back into the business.

CDC had even identified Kitui County as a potential location for a new plant as well as pursuing its interests in Ethiopia and Rwanda.

However, by October when the money came in, things changed.

CDC wanted to change the terms of a six-year convertible note from Nigeria’s Africa Finance Corporation (AFC) which would translate to about 13.2 per cent equity and thus water down the CDC stake.

“CDC felt the 13.2 per cent was not good for their shareholders as it was akin to free equity so they asked AFC to give up their rights,” Mr Paunrana told Weekend Business.

At the time, the AFC facility was Sh5 billion but jumped to Sh6 billion on penalties. So Sh2 billion of the CDC funds first went to AFC, leaving Sh12 billion.

“Whilst our debt was reduced by Sh14 billion from new share issue to CDC Group in September 2016, we began the last quarter of 2016 with a net debt of Sh25.5 billion. In the three months to December 2016, the net debt had decreased by Sh12.3 billion,” the firm said in its ...
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