Regional retailer Nakumatt and its competitor Tuskys could list
on the Nairobi Securities Exchange (NSE) if their proposed merger is
approved and they successfully execute their new business strategy for
at least two years.
A joint media announcement this
week said that Tuskys, Kenya’s second largest retail chain, is coming to
the rescue of Nakumatt, after the two family-owned retailers announced
that they were exploring options for synergies, co-operation and
business integration.
“Such an arrangement will include
strengthening and streamlining management, acquisition of assets and
eventual merger of the entities. These confidential discussions are
continuing and although the engagement has been positive and good
progress has been made, it is important we acknowledge that a formal
agreement is yet to be reached and will be subject to notification and
approval by regulators and lenders,” the retailers said in a joint
statement.
New structure
A source well versed with the proposed merger told The EastAfrican that the
retailers could after the merger, list on the NSE, to inject more
professionalism and transparency which will instil a strong governance
structure in the new outfit.
“Should the merger go through, the new business model will be given two years to work before getting into the bourse.
As it is, there is potential for the new business model to
attract major financing from investors who have been distancing
themselves from the regional retail business due to the strong family
influence and unclear corporate and financial structures.
“With
this merger, there will now be a very good opportunity for them to
enter the NSE with a fresh start for both retailers as partners in a
private company that can very easily go public within the next five
years,” the source said.
It is expected that with the
eventual listing, the rebranded retailer will be clearly structured,
comply with the Capital Markets Authority governance structures, and
will also attract additional capital injection from the bourse to
address their business needs.
The listing is also
expected to lift the tight family control, allowing investors to access
it, an option that has been difficult before.
Despite
declining to make the merger deal public, it is understood that Nakumatt
will, in the interim, access supplies from Tuskys’ supply chain, based
on the goodwill the latter has with its suppliers, a redeemable move
that is expected to see the Nakumatt stores flourish again.
“The
other parties can only come in as debt investors after the merger. We
are still working on the valuation of the two businesses and the merger
process could take up to a year,” Tuskys chief executive Dan Githua
said.
Principal shareholding
Under the proposed merger, both Nakumatt and Tuskys families will retain principal shareholding.
“The
two businesses will collapse into one. But before the eventual merger,
there’s going to be a process of dealing with the liabilities,” Mr
Githuia said, in reference to the money Nakumatt owes its employees,
suppliers and lenders.
The EastAfrican understands
that already a financial advisor has been brought on board to work on
the deals of the merger, assess the financial positions of both outfits
before a formal merger notification is done to the Competition
Authority.
The merger move comes at a critical time in
Nakumatt’s survival plan, having been beleaguered by a $150 million
debt, with some of its supplies already pushing for its winding up.
Nakumatt
has also in the past two months been shutting down some branches in the
region as it seeks to retain a tight financial control to stay afloat.
So
far, it has shut down five branches in Uganda, two in Kenya and sent
hundreds of employees at its Nairobi warehouse on forced break in May.
The
impending rescue by Tuskys is coming seven months after Nakumatt failed
to secure a $75 million financing deal quick enough to pay its
suppliers.
If approved, the merger will create one of the largest supermarket chains in East Africa.
Regulatory hurdles
However,
the plan faces regulatory hurdles given that the two businesses jointly
control more than 50 per cent of the Kenyan and Ugandan retail markets,
meaning that they have to satisfy requirements of regulatory agencies
in both countries.
The agencies will determine the possible market dominance on consumers.
Kenya’s
Trade Principal Secretary Chris Kiptoo while welcoming the move, also
cautioned that: “It is my expectation that they will submit their merger
agreement to the Competition Authority and if it meets the regulatory
compliance requirements, then it is okay. It is now upon the competition
agency to determine what extent of dominance this proposed merger will
have in the retail market. However, we do hope that this merger will
ease off the pressure on Nakumatt,” Dr. Kiptoo said.
Robert
Juma, an analyst with Catalyst Capital said that the proposed merger
will see the retailers enjoy massive benefits from economies of scale
which would be a boost to the overall operational costs.
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