Tuesday, January 13, 2015

KQ - Losses, losses and more losses

Ahhh, my bĂȘte noire never fails to fail...
*I support KQ as an airline but the poor decisions made by (some members of) the Board and Management have financially devastated KQ*

And Godfrey Mwampembwa aka Gado [on Twitter as @iGaddo] says what I could not in 1,000 words...

Source: http://gadocartoons.com/kq-10-billion-loss-blaming-ebola/

Strategic Investors - A brief local perspective

The term Strategic Investor is often bandied around and it seems many firms are looking for one.

What is a Strategic Investor?
Why have a Strategic Investor?
What the pros and cons?

I do not want to post a long post so I will try to be brief.

A Strategic Investor is one who:

  • Invests for the "Long Haul" [not a Speculator nor a Financial Investor] but can sell out if need be.
  • Provides additional capabilities, knowledge or access to superior technology.
  • Often has an additional (in-depth) relationship with the Investee.
Many firms have reached a stage in their lives when they need to collaborate with others to expand or improve their presence and products. It is not easy to go it alone in an increasingly complex world. It is not always about the money but often the need to access processes and technology which is owned by other firms.

  • The Investee does not have to recreate the wheel. Sameer Africa (previously Firestone Tyres EA) had Firestone/Bridgestone as the SI to run the firm, provide technical support and access to suppliers. Firestone/Bridgestone have divested from Sameer Africa but helped Sameer Africa create its own brand/designs under Yana. Sameer is looking for another SI preferably an Asian partner whose technology, designs and processes are more aligned to producing for a competitive and price conscious developing/emerging economy.
  • Cheaper financing. Unfortunately, due to structural reasons, the financing costs in Kenya are very high. Borrowing in KES currently ranges from 12-18% p.a. for many firms. Large foreign firms can borrow in USD at 1-4% p.a. which helps them finance equipment at reasonable rates for its Investees. Seaboard Corporation (USA) owns 35% of Unga Holdings and provides financing for both grain and equipment. In addition, it help Unga access the grain markets at a lower cost using its vast trading network.
  • R&D. Access to R&D is a vital competitive advantage. Many Kenyan firms cannot afford the R&D due to the high costs of funding labs or access to world-class researchers. Safaricom leverages the capabilities of Vodacom to introduce new products e.g. the phenomenally successful M-Pesa is licensed from Vodacom. Whereas some of the infrastructure supporting M-Pesa is being moved to Kenya, it was owned, set-up and hosted abroad for years by Vodacom for Safaricom.
  • Loss of 'control' to an SI versus charting out a path. The SI may be conservative or their thought processes are not ideal or well-suited for the local markets. Equity Bank outgrew both Barclays (it was Kenya's largest bank by a HUGE margin) and StanChart (once a strong #2) in Kenya after the SI of both banks throttled back on expanding in rural areas as well as jettisoning 'low-value' customers. Equity Bank picked up branches and customers to become a behemoth.
  • Loss of value for existing shareholders since the gains/profits are shared with the SI. I do not see this as a major issue since the SI may help make the pie much larger so a smaller share of a much larger pie is a larger piece for everyone.
A partial list of firms with Strategic Investors: [Data may need verification]
  • Scangroup. 51% WPP. Bharat Thakrar who once owned 80% is quite the visionary chap. Hats off.
  • Equity Bank. 25% Helios Partners. HP seems more a financial investor than what a SI is but HP provided EB with significant amounts of capital at the right time. James Mwangi is quite open to innovative ideas about raising capital and Financial Structuring.
  • Unga Holdings [the major subsidiary of Unga Group]. 35% Seaboard Corporation. SC came in when Unga was going through major upheavals.
  • CFC Stanbic. Standard Bank of South Africa.
  • KenGen, KPLC. I am reluctant to call GoK a SI but they do control the firms with 50+% of the ownership.
Not all firms attract a SI but often there are disagreements about value.

KenolKobil, once a fast growing Fuel Marketer badly stumbled due to a significant position in a combination of Fuel and Currency Derivatives had a potential SI (Puma/Trafigura) who backed out after seeing the rot in their books. According to the Board/Management the hunt is still on now that the books have been cleaned up.

National Bank of Kenya with significant GoK (Treasury and NSSF) ownership seems to be looking for a SI.

East African Portland Cement has La Farge (48%) as a SI but the boardroom battles (GoK/NSSF have a significant stake too) have hobbled the firm.

Some firms have ditched a SI e.g. Athi River Mining which almost died in the 1990s had La Farge (Bamburi) as a SI. Bamburi contributed capital and a supply chain which saved ARM. Ultimately, after a clash in strategy with the controlling shareholder (Pradeep Paunrana and family), they bailed out leaving a lot of value on the table. ARM continued to grow by leaps and bounds and may soon be larger than Bamburi in EAC. What a reversal of fortunes!