Blog Archive

Monday, April 30, 2012

Kenya Airways - Commissions Payment Scam

Why is the Government of Kenya going through a Standard Investment Bank to exercise its Rights?

Stockbrokers have protested over the award of a Sh70 million deal to buy Kenya Airways (KQ) rights shares on behalf of the Treasury to a single investment bank, arguing that the contract should have been tendered through competitive bidding.

KQ will pay KES 70mn to SIB. GoK owns 23% of KQ. In essence, the cost to GoK is 23% of KES 70mn = KES 16,100,000 for SIB to stamp a piece of paper? Of course, as a Director on the Board, GoK should NOT have used any stockbroker.

It seems nothing has changed in the 'new' Kenya.

*** I wonder what the status is of the application by KLM & IFC. If its KQ's staff that worked on these deals (as indicated by the executives at KQ) then something is stinky fishy if these applications gone through stockbrokers.

Thursday, April 26, 2012

Kenya Airways - The Flying Rip-Off

The information is from the Rights Issue Information Memorandum of 2012 & the published Annual Reports. I am not sure of all subsequent events. Please let me know of any errors.
My opinions are Italicized.


titus naikuni, the CEO, has ZERO shares in KQ. Sufuri, Nada, Zilch. Hakuna!
alex mbugua, the CFO, has 6,054 shares in KQ worth KES 84,750 (at 14/- each)
The 2 Executive Directors compensation for 2010-11 was KES 66,000,000/-
The Net Asset Value per Share = KES 50
Rights Issue Price = 14/-
Rights Offer Entitlement: 16:5 (That's 3.2 'new' shares to be paid for for each 1 held)

So whereas titus and alex are paid KES 5.5 MILLION per month by KQ between them they have shares worth 85,000/-.
That's a decimal point of a decimal point. The salaries are not affected by how much Shareholder Value they destroy.

KQ's Net Asset Value as of 31st March 2011 (Last Audited Accounts) was KES 23,090,000,000 which divided by 461,615,484 shares = KES 50/- (NAV/Share)

The Board of Directors (excluding 'corporate directors' viz Treasury/Govt of Kenya & KLM) have less than 25,000 shares. The largest chunk is 10,090 held by the chairman.

The BoD got benefits & fees of KES 12 Million in 2010-11 (12 months)

So the BoD which owns a piddling (less than) 25,000 shares worth (at 14/-) max market value value of 350,000/- ... decided to sell Rights at 14/- at a ratio of 16:5 (3.2:1).

Therefore a shareholder who is UNABLE to exercise the Rights will be diluted to 24% of the original value.

Current 461,615,484 shares = NAV of KES 23,090,000,000/-
New Shares 1,477,169,549 = Net Proceeds 20,109,959,011/-

So are the existing shareholder getting a stick up their, erm, evacuation orifice? YES
Does the BoD care? NO

BTW, the directors AND their families enjoy (almost) free flights wherever KQ flies. Not economy but First Class and Business Class. So more destinations that KQ flies to means more free or discounted flights in Biz Class or First Class.

Compare the Directors, including the CEO, to other CEOS like:

Pradeep Paunrana of Athi River Mining (30%+ shareholding)
Bharat Thakrar of ScanGroup (20% shareholding)
James Mwangi of Equity Bank (5% shareholding)
Jacob Segman of KenolKobil (Options for 5%+ shareholding)

The share prices for the firms in which the CEOs have a stake have done much better than KQ. Each of them trades at more than the Net Asset Value per Share especially Equity Bank & ScanGroup. They have done deal to expand their firms' footprint without destroying the underlying Shareholder Value.

Now the CEO of KQ has ... ZERO shares = 0% shareholding.
Annual compensation unknown but at least KES 33,000,000/- (KES 66,000,000/- between him & the FD)
KQ NAV/Share = 50/-
Current market price = 14.95
Rights (New Shares) sold at 14/-

Instead of sweating the current assets, KQ's BoD & Management are raising more Capital by selling shares in KQ to many including 'non-shareholders' at a HUGE discount. So IFC, Citibank, etc will buy shares at 14/- whose NAV/Share is much higher.

Want a kick in the pants?

KQ's BoD in its 'wisdom' decided to make the New Shares rank pari passu for dividends for the completed Financial Year ending 31st March 2012. So any dividend declared for FY 2011-12 will be shared with NEW SHARES even though the 14/- from the New Shares did not contribute a single penny to profits for FY 2011-12. So whereas existing shareholders 'money' worked for the entire FY 2011-12, yet the New Shares whose cash starts 'working' in June 2012, will get 76% of the dividend payout for FY 2011-12.

Just a reminder, while KQ's BoD gets all those perks, sitting fees, free flights & cash compensation, they own less than 25,000 shares in KQ. So they don't really care about kicking KQ's minority shareholders in the pants. They will probably demand an increase in perks & sitting fees.

Would the 4 'owner-CEOs' do the same? I doubt!

To add insult to injury...

The Lead Transaction Brokers (Standard Investment Bank) are going to 'process' [which means stamping a form] on behalf of the Govt of Kenya and 'earn' KES 70,000,000 or more!

From Business Daily Africa of 25th April 2012

Stockbrokers have protested over the award of a Sh70 million deal to buy Kenya Airways (KQ) rights shares on behalf of the Treasury to a single investment bank, arguing that the contract should have been tendered through competitive bidding.
The Kenya Association of Stockbrokers and Investment Banks (Kasib) has written to the investment secretary Esther Koimett, complaining that the picking of an intermediary to buy the national carrier’s rights on behalf of the Treasury was shrouded in secrecy.
The Treasury owns 23 per cent of KQ shares, and the uptake of its full rights is expected to cost Sh70 million in brokerage commissions.
“We are unaware of any competitive tender process undertaken to procure the services of the submission of the provisional allotment letter (PAL) for the Kenya Airways rights issue on behalf government in accordance with the Public Procurement Act,” said the Kasib letter, which did not, however, name the implied investment bank.
“In the absence of an open tender, the provisional allotment letter should be divided and allocated equally to all the licensed stockbrokers that have been appointed by the issuers,” added the letter.
The BoD added even more salt to the wound by paying CASH to the 'vendors' & plan to pay the Stockbrokers in cash instead of Shares. After all if the stockbrokers are so confident then why not accept shares? Of course, the stockbrokers take the lead from KQ's CEO who has ZERO shares!

KQ's alex praised KQ's Finance Team (including Jane Kioi) for 'closing' the deal with IFC. So will a stockbroker submit IFC's application when it is KQ's 'team' [paid by KQ] who brought IFC to the table?

IFC is getting an awesome deal by buying into KQ at a huge discount at the expense of existing shareholders. Click on the link below for more information.

World Bank’s IFC to own 7.4pc stake in Kenya Airways after offer

Will KLM's [who is a corporate director] application be handled like GoK's application i.e. commission paid to a broker who 'stamps' the PAL form?
Financing of 'New Shares'

Many Kenyan banks will offer 50% Loan To Value (LTV) for shares. This means if one deposits shares worth KES 1,000,000/- the maximum loan given against that will be 500,000/-.

Therefore a Current Shareholder deposits 100,000 KQ Shares worth (at market price of 14/-) with XYZ bank will get KES 1,400,000/- to apply for KES 1,400,000 worth of KQ New Shares.

Current Shares Held = 100,000
Value of Current Shares = 1,400,000/-
Rights Alloted = 320,000
Rights Price = 14/- each which means one needs 4,480,000/- to exercise them
Loan from Bank = 1,400,000/- (based on 50% LTV)
Maximum Rights exercised = 100,000
"Lost" Rights = 220,000

Therefore, the existing shareholder LOSES the net Shareholder Value (50/- per Share) after the Rights Issue is over since the Untaken Rights will be alloted to others.

Is the existing (Pre-Rights) Shareholder who cannot exercise his/her full Rights Entitlement getting screwed over? YES and what a screwing...

Via Daily Nation - Click on the Link Low demand for KQ rights issue by retail investors

Who are retail investors? The 70,000+ shareholders (with less than 5,000 shares) who will be screwed over.

The expansion is a good idea but look how the following firms (as shown above) have raised funds WITHOUT diluting existing shareholders.

Equity Bank sold shares (25% of the Issued Shares) at a price that was MARKET PRICE to Helios. James Mwangi is a smart chap. He did not dilute his existing shareholders. Of course, JM at the time owned a huge chunk (10%) of Equity. Furthermore, other Board Members like Mary Wamae, Peter Munga, etc also owned considerable (20%+) shares in Equity Bank. They were conscientious about PROTECTING existing shareholders.

Compare to KQ's BoD which has less than 25,000 shares in KQ.

Athi River Mining recently bought a factory in Rwanda & want to increase the capacity by 500% as well as make additional improvements. ARM is in the process of increasing its production in Kenya as well as a huge NEW factory in Tanzania. Pradeep Paunrana & family have a large stake in ARM. He has grown ARM using a smart combination of debt & equity. The 'shares' he has sold in ARM to other strategic investors has been through Convertible Debt. The latest $50mn Convertible Debt has an exercise price HIGHER than the current market price & much higher Price to NAV.

Compare to KQ. The 'new shares' are being sold at a HUGE discount to NAV. The existing shareholders will be diluted if they can't take up the Rights. Unlike Pradeep, KQ's CEO has ZERO shares.

ScanGroup has grown by leaps & bounds since its listing on the NSE under Bharat Thakrar (currently 20% owner) the smart & consummate dealmaker. Some MPs even criticized ScanGroup for having a low NAV/Share upon listing. Whereas ScanGroup shares have grown multiple-fold in price, KQ has DESTROYED Shareholder Value. Bharat cut a deal with WPP to buy shares in ScanGroup for cash at a huge PREMIUM to NAV. He did not sell minority or himself shareholders out.

Compare to KQ.

Question to potential 'new' shareholders. If KQ's Board of Directors can do this to existing shareholders today, how sure can you be the same will not be done to you in 3 years?

Comments? Questions? Please let me know...

Govt of Kenya to pay commission for KQ Rights Offer

So Government of Kenya plans to buy Shares in Kenya Airways through the Rights Issue.
GoK is a 23% shareholder in KQ & has a board seat (according to the Information Memorandum)

This begs the question... Why would GoK use Standard Investment Bank to apply for the Rights (for which KQ has to pay 1.5% approx KES 70mn) when it is allowed to directly submit its application to KQ?

Click the link above for the Business Daily Africa story.

Stockbrokers have protested over the award of a Sh70 million deal to buy Kenya Airways (KQ) rights shares on behalf of the Treasury to a single investment bank, arguing that the contract should have been tendered through competitive bidding.

The Kenya Association of Stockbrokers and Investment Banks (Kasib) has written to the investment secretary Esther Koimett, complaining that the picking of an intermediary to buy the national carrier’s rights on behalf of the Treasury was shrouded in secrecy.
The Treasury owns 23 per cent of KQ shares, and the uptake of its full rights is expected to cost Sh70 million in brokerage commissions.

The KES 70mn saved could have been used to buy equipment, hire new staff as well as put a down-payment for an Embraer.

Furthermore, what about KLM's shares? [Also on the Board] = KES 75mn in commissions
What about IFC's shares? [The deal was negotiated by KQ's senior management] KES 30mn in commissions

KQ's shareholders should be outraged! Adding salt to the wound when the Rights Shares are being sold to IFC among other non-Shareholders at a 72% discount to NAV/Share (KES 50 per the last audited results)

Wednesday, April 18, 2012

Tesco curbs UK expansion to focus on revival

Just a quick note to remind us of a Kenyan firm that ought to do the same...

LONDON, April 18 (Reuters) - Tesco, the world's No.3 retailer, slashed expansion plans for its main British chain and said it would spend over 1 billion pounds ($1.6 billion) on improving stores and online shopping as it battles to recover from a shock profit warning.

Monday, April 16, 2012

KQ Rights Issue 2012

Excerpts from the Information Memorandum issued on 30th March 2012
Italics are calculations/assumptions/questions I have done/made/asked based on the information provided in the IM. Please let me know of any errors.

6.7 Pertinent Financial Data

Entitlement Ratio = 16 New Shares for every 5 Shares held
Net Asset Value (NAV) as at 31 March 2011 = KES 23,090,000,000
Offer Price per share = KES 14
Total Number of issued and fully paid up shares before the Rights Issue* = 461,615,484
NAV/Share = 50/- (before the Rights Issue)

Basic earnings per share (EPS)* = KES 7.66
Dividend Per Share (DPS)* = 1.50
Market capitalisation on 29 February 2012 = KES 8,032,109,422

Number of New Shares on offer under the Rights Issue = 1,477,169,549
(This is 3.2x the current Issued Shares)
Gross proceeds of the Offer = KES 20,680,373,686
Approximate net proceeds of the Offer = KES 20,059,959,011

Total number of issued and fully paid up shares after the Rights Issue assuming full subscription = 1,938,785,033

Fully paid up share capital of KQ post Rights Issue assuming full subscription (inclusive of share premium) = KES 22,988,451,106

6.5 Underwriting of the Rights Issue
Conditional, inter alia, on receipt by the Company of the Major Shareholder Undertakings and on the Minimum Subscription Level being met, the Underwriter has agreed, pursuant to the terms of the Underwriting Agreement, to purchase the Underwritten Shares. The Underwriter is not related to KQ but provides banking and other credit related facilities in the normal course of business. KQ has agreed to pay to the Underwriter an underwriting commission of 2 per cent of the gross value of 30,000,000 New Shares.
The Underwriter may enter into sub-underwriting arrangements with third party investors, including Eligible Shareholders and will pay any commissions due under such arrangements from the commission it will receive from the Company.
Shareholders should note that the Rights Issue has not been fully underwritten. The Underwriter has only agreed to underwright the Underwritten Shares and will only be underwriting a maximum of KES 420,000,000 under the Rights Issue. As such, any shareholder or investor trading in the Rights should beware that the Rights Issue may not become unconditional.

KES 420mn is only 2% of the total amount KQ wants to raise. That is a very low level of underwriting.

Underwritten Shares: subject to the Foreign Investor Requirements and the Foreign Investor Regulations, a maximum of 30,000,000 New Shares less the aggregate number of New Shares allotted to Foreign Investors and Regional Investors pursuant to the Initial Allotment, the Excess Allotment and the Rump Allotment (save for those allotted pursuant to the Major Shareholder Undertakings)

If we deduct "the aggregate number of New Shares allotted to Foreign Investors and Regional Investors pursuant to the Initial Allotment, the Excess Allotment and the Rump Allotment (save for those allotted pursuant to the Major Shareholder Undertakings)" from the 30,000,000,000 underwritten shares then Citibank need not even take up 30,000,000 shares even if there is an under-subscription after foreign investors & EAC investors are accounted for.

12.3 Direct Equity Investments of directors
Table 22: Directors’ shareholding in KQ as at 31 December 2011
Permanent Secretary to the Treasury* = 106,171,561 (26%)
These KQ shares are held by the Permanent Secretary to the Treasury (which is a body corporate) as custodian for the Government of Kenya.

Evanson Mwaniki = 10,090  = (0.0022%) = KES 141,260
Alex Mbugua = 6,054  = (0.0013%) = KES 84,756
Ayisi Makatiani = 5,700 = (0.0012%) = KES 79,800
Dinesh Kapila = 4,036 = (0.0009%) = KES 56,504
Cyrus Njiru = 1,000 = (0.0002%) = KES 14,000
Salma Mazrui-Watt = 1,000 = (0.0002%) = KES 14,000
Titus Naikuni = 0 (Zero) = (0.0000%) = KES 0

Source: KQ management
Price to calculate value is 14/- per share

37 c) Remuneration for directors and key management compensation
Directors’ remuneration:
As executives              2010: KES 63,000,000 2011: KES 66,000,000
As non executives        2010: KES 10,000,000 2011: KES 12,000,000
Non-monetary benefits 2010: KES 5,000,000   2011: KES 5,000,000

Page 93 of the IM "The Board is made up of a non-executive Chairman, eight non-executive directors and two executive directors". The executive directors are:
Titus Naikuni
Alex Mbugua

11.2.3 Shareholders who do not subscribe for New Shares in the Rights Issue will experience dilution in their ownership of the Group
If Eligible Shareholders do not take up their entitlements to New Shares under the Rights Issue by the latest date for application and payment in full in respect of their entitlements to New Shares that are set out in this Document, their proportionate ownership and voting interest in the Group will be reduced, and the percentage that their Ordinary Shares represent of the ordinary share capital of the Group will be reduced accordingly.

To maintain the shareholding in percent i.e. not be diluted, a current Shareholder with:
  • 100 shares (valued at KES 1,400) needs to exercise 320 Rights for KES 4,480.
  • 1,000 shares (valued at KES 14,000) needs to exercise 320 Rights for KES 44,800.
  • 10,000 shares (valued at KES 140,000) needs to exercise 320 Rights for KES 448,000.
  • 100,000 shares (valued at KES 1,400,000) needs to exercise 320 Rights for KES 4,480,000.
Using KES 14 as the approximate price per share on the NSE.

If a current Shareholder is unable to exercise any of the Rights & the Rights Issue is fully subscribed the dilution in ownership will be 5 divided by 21 multiplied by the percentage ownership pre-Rights.

5 (pre-Rights shares) / 21 (post-Rights but 16 bought by others) x 1.00% (pre-Rights) = 0.238% (post-Rights)
[Assume 1% ownership pre-Rights = 4,616,154 shares]

Page 101 of the IM “Bilateral Air Service Agreement” shall mean any agreement made by the Government of the Republic of Kenya with the authorities of any other state pursuant to which the Company shall have been granted the right to operate scheduled passenger and air freight services between Kenya and that contracting state on terms, inter alia, that the Company shall remain Substantially Owned and Controlled by Nationals of Kenya.

What happens if "the Company shall remain Substantially Owned and Controlled by Nationals of Kenya" is not the case under the various BASAs that require it?

Wednesday, April 11, 2012

Manufacturing - Egypt & the downdraft

Kenyans manufacturers have (rightly so) complained about Egypt's 'misuse' of COMESA to sell subsidized goods into the region.

Last week, I had an interesting conversation with the MD of a major Egyptian firm discussing the challenges facing Egypt.

  1. Rising cost of fuel. For decades, energy was subsidized including petrol & diesel. Egypt WAS an oil exporter but not faces a shortfall. The subsidies are unsustainable.
  2. Rising cost of electricity. Egypt has relied on 'cheap' electricity from the dams across the Nile. The water was accumulated at the expense of the riparian states including Kenya thanks to a lopsided arrangement.
  3. Rising cost of LNG. Egypt currently produces enough LNG for its own needs but unless it charges market price to its citizens, there will continue to be wastage. They need to invest in conversion plants otherwise the LNG will continue being exported to Israel instead of local consumption. These plants do not come cheap!
Kenya needs to prepare herself to become the next 'African' manufacturing hub. ICT & finance are important but farming & manufacturing underpin a country's wealth in the long-term. See China & India as examples.

What next?


Kenya needs to REDUCE the population growth. Silly arguments like it's unafrican to count how many kids one has, some chap with a beard said go forth & multiply like rabbits, today's kids are tomorrow's consumers, etc.

The argument that "today's kids are tomorrow's consumers" is a circular argument. Who is going to feed, clothe, medicate & educate the kids TODAY? If one cannot feed, clothe, medicate & educate the kids TODAY then they will probably die early [wasting resources], turn into criminals [read Freakonomics or read about the Mungiki] or worse. We need professionals & entrepreneurs NOT more unskilled workers!

Kenya is a food-deficient country & needs the (consistent) MINIMUM food production to catch up to the 43 million BEFORE growing the population.


Develop multiple sources of energy. I am glad Kenya has started exploiting renewable geothermal & wind resources. The oil find is a so-so. It should be a bonus not a core pillar of energy sufficiency. Kenya needs to encourage the use of solar electricity & hybrid vehicles. 

Do not subsidize energy consumption or the same problems Egypt faces will bite Kenya in the future. Try to mitigate extreme price volatility but avoid price controls.


All sort of infrastructure development is needed. Private money is available as long as the 'rights' of firms/investors are protected. Shoot-to-kill thieves who steal/damage transformers & cables. Punish polluters. Digitize the land records. Improve the efficiencies of the courts.

Let builders innovate or use new technologies. Some will fail but that is OK. It does not mean authorities allow shoddy construction but allow builders to 'think different'.

Kenya has the ability to become a manufacturing base for COMESA. At the minimum, an alternate to Egypt & South Africa as an 'assembler' but that allows Kenyans to develop new skills.

China, India, South Africa & Egypt are facing cost pressures and are exporting 'cheap' manufacturing elsewhere. Instead of letting Thailand, Vietnam or Pakistan take over our 'natural' markets (COMESA) we need to be ahead of them. Kenya needs to push for Double Taxation Agreements with all COMESA  (& beyond) countries. Kenya needs to tighten its belt on 'conspicuous consumption' & build roads, railways & airports that makes us the HUB of East & Central Africa.