Uchumi rights issue: Now comes the hard part

Uchumi rights issue: Now comes the hard part
PETER MUNAITA says Uchumi will come under pressure from those creditors, among them suppliers and lenders, who declined the debt-for-equity deal that was on offer
Uchumi Supermarkets has moved from a problem of scarcity to one of plenty, with its Ksh1.2 billion ($16.2 million) rights issue being oversubscribed by Ksh69 million ($932,400).
The success of the rights issue puts the chain's chief executive, John Masterten-Smith, on the spot over how he deploys the newfound resources at his disposal to turn around the retail store, which is expected to announce a loss of Ksh900 million ($12.2 million) by the end of the month.
Besides operational issues, Mr Masterten-Smith will come under pressure from those creditors, among them suppliers and lenders, who declined the debt-for-equity deal that was on offer and are waiting to square their positions.
A meeting of the main shareholders is scheduled for next week to deliberate on how to balance the various interests laying a claim on the Ksh1.2 billion raised.
One issue already settled is that only Ksh47 million ($635,100) of a Ksh117 million ($1.6 million) shareholder loan will be converted into equity, leaving the company to repay the balance in full or negotiate new terms for the credit with the two shareholders – the Industrial and Commercial Development Corporation and its equity holding arm, ICDC Investments (ICDCI).
James Murigu, head of sponsor-ing broker Suntra Investment Bank, said the fate of the loan will depend on its compliance with the terms of other debt instruments held from the Kenya Commercial Bank and PTA Bank.
"The understanding is that the shareholders are in no hurry to liquidate the loan," Mr Murigu told The EastAfrican. ICDC, ICDCI and Kenya Wine Agencies Ltd held a total 52 per cent interest in the company before the rights issue, which has now fallen to just under 20 per cent.
ICDCI now has a 10.4 per cent stake in the company, Kwal 6.3 per cent and ICDC 3.2 per cent. The dilution was achieved by their relinquishing their rights, which were taken up by a "good mix" of retail and institutional investors.
Although a breakdown of the new shareholding structure will not be released until this week, it is understood that the rights issue was supported heavily by retail investors, debunking the myth that public share offers cannot succeed without the blessing of leading mutual trust funds.
The leading equity investment trusts and leading high-net worth individuals and corporates were reliably advised to "skip" the Uchumi rights issue and await the much anticipated initial public offer by the Kenya Electricity Generating Company (KenGen). The Privatisation Steering Committee has recruited transaction consultants who are now working on the modalities of the KenGen IPO.
Mr Masterten-Smith maintains that the management's role will be to implement strategic initiatives decided on before the rights issue, including reducing dead stock, franchising the brand across Kenya and ensuring real-time availability of products on the shelves.
Uchumi Supermarkets recently entered a product distribution partnership with Bidco Oil Refineries Ltd, which will restock specific branches from its Thika plant without necessarily passing through Uchumi's central distribution warehouse in Nairobi.
The partnership with Bidco Group and 10 other major suppliers is expected to free up billions of shillings tied up in stocks which can be used to restructure other operations and help turn around the cashstrapped supermarket chain, which closed 10 branches earlier this year and laid off 1,000 employees.
Mr Murigu said the success of the rights issue – marketed as a long-term investment – showed public confidence in Uchumi's strategic plan. "The rise in the share price from Ksh12 (16 US cents) per share to Ksh14.80 (20 US cents) this week confirms this," he said, projecting that the share would appreciate beyond the Ksh20 (27 US cents) per share mark.
However, analysts see the security coming under downward pressure as soon as the 120 million new shares start trading later this month, especially if the shares in retail investors' hands turn out to be substantial.
Mr Murigu does not rule out "a small dip in the short term" in line with trends with other rights issues, which caused a slide in the securities before the shares appreciated. This was what happened with the share splits effected by Kenol and East African Breweries