Hima Cement sale shines light on Uganda tax regime

Hima Cement in Kasese, Uganda. PHOTO| FILE

By BERNARD BUSUULWA

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Despite high expectations of juicy returns anticipated from the sale of a Ugandan subsidiary, Bamburi Cement Lmtd suffered a net loss of $2.9 million last year on

account of one-off taxation costs and legal settlement expenses tied to the sale of Hima Cement Uganda Ltd.

Under the deal, Himcem Holdings, Cementia Holding AG, Sarrai Group and Rwimi Holdings jointly acquired the entire issued share capital of Hima Cement from Himcem Holdings Lmtd amounting to 70 percent shareholding; equivalent to 1,335,600 shares while Cementia Holding AG acquired 30 percent shares in the business.

The total acquisition cost stood at $120 million, according to a corporate notice previously issued by Bamburi Cement.

However, a recent profit warning submitted to the Nairobi Securities Exchange (NSE) indicated a projected 25 percent drop in the cement maker’s earnings for 2023, a setback attributed to Hima Cement exit transaction.

Read: Bamburi Cement issues profit warning

Bamburi’s total turnover grew by 6.3 percent to Ksh22 billion ($162 million) by the close of December 2023 while operating profits increased by 48.3 percent to Ksh1 billion ($7.4 million) during the period under review.

The firm’s operating expenses rose by 3.9 percent to Ksh20.8 billion ($153 million) by the end of December 2023 while net finance income amounted to Ksh38 million ($280,008) during the same period.

Losses from Hima Cement’s discontinued operations amounted to Ksh1.1 billion ($8 million) last year.

“The manufacturing sector in Uganda has limited competition regulatory burdens to deal with. The telecommunications industry on the other hand is more exposed to competition regulatory controls. Mergers and transactions in Uganda are subject to a capital gains tax of 30 percent, a stamp duty of one percent of the transaction value, and transaction advisory fees of around two percent of the deal value among others.

This highlights huge costs tied to the execution of mergers and acquisitions in Uganda and clearly explains why we get few transactions in this area. This also explains why no investment bank specialises in such transactions in this town.

Besides that, the latest political events calendar is steadily shifting investors’ minds away from the pursuit of new mergers and acquisition deals to monitoring political transition activities,” observed Allan Lwetabe, Investments Director at the Deposit Protection Fund of Uganda.

“Mergers and acquisition deals are subject to Value Added Tax (VAT), Capital gains tax and stamp duty... Government ought to consider tax incentives for company mergers and acquisitions because they usually carry medium and long-term economic benefits for the country,” said Martin Mbanza Kalemera, a Kampala-based lawyer.

Read: Bamburi investors expect special dividend after Uganda deal closure

Previous M&A deals that suffered tax blues include Tullow Oil’s acquisition of 50 percent shareholding in Heritage Oil and Gas’s Ugandan exploration assets valued at $1.5 billion in 2009.

Whereas the URA demanded a capital gains tax of $404 million from that transaction, the two oil exploration firms disputed the tax bill in a complex legal scenario that generated four court cases filed in Uganda and the United Kingdom over the validity of the government’s taxation demands. After three years of legal tussles, Tullow cleared the full tax bill after Kampala demanded that the Irish explorer settle it before receiving approvals for the transfer of oilfield assets.

An acquisition of the former Orient Bank by the defunct Bank PHB of Nigeria in 2010 also attracted a similar taxation headache.

While Bank PHB bought 80 percent shares in the Orient Bank valued at $62 million, this transaction prompted a huge income tax bill and legal action from the URA a few months after the official announcement.

In 2012, former shareholders of Orient Bank and URA reached a final settlement of roughly Ush26 billion ($6.8 million) in respect of capital gains tax related to the acquisition deal. Orient Bank was subsequently acquired by I&M Bank of Kenya in 2022.

“No one is in control of everything that happens in an investment transaction. The company might have been undervalued during the transaction process. Uganda Revenue Authority (URA) is very aggressive these days and it is possible that it came up with different tax assessments at every stage of that transaction. I see very few mergers and acquisition deals involving private equity firms happening in the second half of this year. But I see various family-owned businesses that are trying to sell off their operations this year because of retirement needs or a desire to invest in new opportunities,” said George Otim, an investment adviser based at BDO Uganda