Barely two years after Kenyan equity firm TransCentury exited
the Kenya-Uganda railway concessionaire Rift Valley Railways, the firm
is again on the verge of a major change in shareholding, with reports
indicating that Egyptian majority shareholder Qalaa Holdings is looking
for buyers. FILE PHOTO | NATION MEDIA GROUP
By MICHAEL WAKABI
In Summary
- Barely two years after Kenyan equity firm TransCentury exited the Kenya-Uganda railway concessionaire Rift Valley Railways, the firm is again on the verge of a major change in shareholding, with reports indicating that Egyptian majority shareholder Qalaa Holdings is looking for buyers.
- Although officials at RVR refused to comment on the reports, sources familiar with the developments say there have been exploratory talks with firms from the US, Russia and South Africa.
- As part of its transformation strategy, Qalaa has decided to relinquish insolvent investments in its efforts to stabilise profitability while redirecting resources to “value adding projects with promising futures.”
Barely two years after Kenyan equity firm TransCentury
exited the Kenya-Uganda railway concessionaire Rift Valley Railways, the
firm is again on the verge of a major change in shareholding, with
reports indicating that Egyptian majority shareholder Qalaa Holdings is
looking for buyers.
Qalaa is talking to several suitors with a view of selling
either part or its entire 85 per cent stake in the concession that still
has 17 years to go.
Although officials at RVR refused to comment on the reports,
sources familiar with the developments say there have been exploratory
talks with firms from the US, Russia and South Africa.
“Qalaa is a venture capital fund. When they get a good offer,
they will exit. Now is the best time because the prospect of
transporting Kenya’s crude to the Coast would be attractive to any
investor,” said a source who claimed Qalaa was considering proposals
from five potential investors.
Given that TransCentury sold its 34 per cent in RVR to Qalaa for
$43.7 million in 2014 and Centum sold its 10 per cent stake in 2010 for
$4.5 million, RVR could now be worth $250 million.
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Were Qalaa to exit with the basic investment in infrastructure
and rolling stock already made, the focus would be on operational
efficiency, potentially resulting in a more vibrant operation.
In an ideal world, the new investor should be an experienced
rail operator. Some stakeholders have accused Qalaa of concentrating too
much on energy investments in the Middle East and North Africa.
Competition from the operator chosen to run the standard gauge
railway, speculated to be eventually from China, is also another factor
for any buyer to consider.
Another source in Kampala says Qalaa has been trying to prepare
the Kenyan and Ugandan governments for a possible sale to a third party.
Kenya, however, said Qalaa had not indicated any intention to
exit the Kenya-Uganda operation. “They are the largest shareholder in
RVR and if they want to exit, they have to give us notice. So far, we
have not received anything,” said Atanas Maina, Kenya Railways
Corporation managing director.
Signs that the Egyptian investor was reconsidering its
investment in RVR first emerged in its report of the 2016 first quarter
results where it classified the investment in RVR as “liabilities held
for sale.”
“Total debt as at March 31 stood at EGP5.64 billion ($630
million) excluding Egyptian Refining Company and following the
classification of Rift Valley Railways as liabilities held for sale.
Qalaa’s total consolidated debt at the end of March 2016 stood at
EGP19.11 billion ($2.1 billion), up from the EGP17.11 billion ($1.9
billion) booked at the end of the previous quarter,” the company says in
the report.
Although some sources within the company claimed Qalaa was
taking advantage to cash in on its stake following increased investor
interest in RVR after the Kenyan government announced its intentions to
transport its oil by road and rail, the report suggests that the firm
was losing patience with RVR’s slow turnaround and was recasting its
investment strategy.
According to the financials, losses from Qalaa’s discontinued
operations stood at EGP93.9 million ($10.5 million) during quarter one
with Rift Valley Railways contributing EGP68 million ($7.6 million) of
that figure.
“Qalaa’s management had concluded that additional capital is
required to turnaround the company’s weak operational performance and
continued unprofitability. However, given the strategic direction of
allocating full capacity and resources to core energy units, management
decided to categorise RVR as a discontinued operation with its
consolidated debt of EGP1.7 billion ($191 million) now classified as
liabilities held for sale,” the report says.
As part of its transformation strategy, Qalaa has decided to
relinquish insolvent investments in its efforts to stabilise
profitability while redirecting resources to “value adding projects with
promising futures.”
Although the company has made progress reducing turn around
times for cargo from Mombasa to Kampala from 21 days to just seven, on
the back of investments worth $287 million, its share of cargo traffic
from Mombasa has remained stuck in the single digits.
The investment programme has been financed through a combination
of debt, equity and cashflow. Lenders contributed $164 million, the
shareholders pumped in $82 million while $41 million came from
cashflows.
RVR chief financial officer Bong Yoon disputed reports that the
concession had fallen behind on payments to the governments of Kenya and
Uganda.
“From my position, we are doing fine. We have met all the KPIs and we are meeting our obligations to the governments,” he said.
But The EastAfrican has separately learnt that RVR had
stopped paying the principal and has since the beginning of the year
only been paying interest on the loan extended to it by a consortium of
lenders led by the African Development Bank, which contributed nearly a
quarter of the $164 million finance package put together by a consortium
of lenders that include Kenya’s Equity Bank, which put up of $20
million.
Sources in Uganda dispute Mr Bong’s assertion, pointing out that
while the concession is up to date to the last quarter with concession
fees to Uganda, it has not paid Kenya for two consecutive quarters.
RVR is also embroiled in a dispute with Kampala where the taxman
wants it to pay VAT on its concession fees. RVR is said to have so far
refused to pay $2.7 million in VAT arrears.
There is also an outstanding dispute with the regulator Uganda Railways Corporation over the revenue sharing.
When they took over the concession in 2010, Kenya and Uganda
were sharing revenue at a ratio of 3:2. While RVR continued with this
arrangement for a while, it unilaterally changed the ratio to 4:1,
effectively halving Uganda’s earnings from the business.
Uganda is claiming $4 million in accumulated arrears and has issued a notice of default.
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