Tuesday, June 13, 2006

Uchumi: more good money after bad

Yesterday a nearby Uchumi opened to enable customers to buy up dairy products at a 25% discount before the produce spoilt. I bought some mince meat and butter from the roped-off deli section that also included ice cream, eggs, cheese, and frozen chicken. Uchumi has not yet reached the 50% 70% and 90% going out of business sales discount stage, but will it ever get there?

Looking Back
Royal Investment Management Ltd was engaged to advise the Uchumi board on a fund-raising strategy in 2005. In an October 2005 issue of Business Post magazine, the firm’s MD Mr Hardy Pemhiwa wrote that "the initial plan presented to the board was for a strategic equity partner (SEP) to bring in management and capital. However the plan was changed after they realised that all the SEP’s wanted to buy Uchumi cheaply, turn it around and reap huge capital gains. SEP’s had even suggested de-listing the company (which has now happened) and re-list it after a turnaround which would have (unfortunately) hurt Uchumi’s loyal but minority shareholders. So the SEP idea was dropped in favour of a rights issue where relatively unsophisticated, Kenyan investors (myself included) re-capitalised the company which collapsed only seven months later.

What next?
There are stories of South African supermarket executives in town with plans to pick and pay for the remnants of Uchumi. But plans to turn round the company quickly are already being thwarted by aggressive suppliers who are silently supported by frustrated shareholders. You would be hard pressed to find a judge who does not have an interest in Uchumi shares or future – and judges are not sympathetic to Bank’s in many receivership and loan disputes since they have also probably had bad personal experiences themselves with Banks.

The June 19 deadline for the sale of Uchumi’s stores is likely to be pushed far into the future because once bank cases go to court they can take years to resolve. Much money will be spent in legal bills to unravel. Meanwhile the parallel investigations are likely to draw in suits against/or proposals for action by the auditors, parliamentary committees, CMA & NSE, maybe KACA and even the government - any of which may take years to implement.

Expects some fireworks at Uchumi lead banker KCB’s AGM on Friday June 16.


sassy said...

I can bet that the shareholders of KCB wont spare the bank at the meeting. I hope you will attend the AGM meeting and post your take on it

gathinga said...

from the foregoing several issues arise:

were uchumi's assets to be disposed off as advertised then only the banks would recover part of their cash. No one else suppliers or shareholders would be cut in. this is very selfish. looks like these banks have someting up their sleeves.

There is an article in the east african that the trade ministry has asked the head of civil service to intervene. I dont know how exactly but this remains the only hope for us 'small' shareholders.

do we think we should organise a forum to mobilise small shareholder to demand that we be consulted, just like the suppliers have....am ready for naything

Anonymous said...

I think there is lack of information in understanding the rights of PTA and KCB. In most liquidations lenders have the rights to receiving payments.... ordinary shareholders receive payment last.

In the US investors can go to court and force the banks to pay penalties and fines as happened in the case of Enron. Unfortunately kenyans lack the legal systems that will ensure speedy conclusion of court cases. There is also very little legal precedent that can be used to decide the court cases.

Sad as it may be we are lacking in corporate fraud lawyers and this poses a great challenge for investors seeking restitution.

Ken said...

The trade minister is just engaging in populism to get aggrieved voters on his side. He should responsibly have a go at the CMA, the NSE and his PS for not having seen this coming.
I think if the liquidator opts to have it sold then maybe the shareholders could get something out of it.
@Gathinga, ordinary shareholders get the remaining loot once the debts have been paid out. The best you could do at this time is to try and fight for transparency in the disposal of the assets to ensure they make the most of it (if thats the route they take) or transparency in any takeover/merger.
I am not sure how the SEC in the US handled the worldcom bankrupcy but I dont think the shareholders lost out entirely.
The CMA here really needs to style up and this is a great time to demand reform and accountability.

VItuVingiSana said...

Guys & Gals:

It is easy to blame the "big bad banks" for everything.

P.S. This reminds me of various incidents few years ago when ALL the economic ills were blamed on "Asians" & now it the "banks" turn! BTW, chances are that if Suresh Shah (a patriotic Kenyan Asian) had not been "retired" then Uchumi would have been the pre-dominant shopping/supermarket chain in East Africa (not just Kenay). Furthermore they would have whooped any S.African firm just like EABL did to politically connected Castle! This guy used to work Sundays as a CEo not being a DJ or living the high life!

I have simplified concepts since there are multiple complex instruments & strategies but Kenya is the nascent stages where most hybrids, derivatives, etc are not traded or available.

Banks are generally first in line (after government & in many cases employees) even in the USA. Debt always precedes equity. If the shares rise from 10/- to 15/- the debtholders don't benefit from the capital gains. Nor do debtholders benefit from increased profits.

If you give a loan you want to be first in line as well as being secured. NBK & KCB had problems collecting because of "unsecured" loans to crooks (ahem, "investors").

Banks are in business to MAKE money. That's why those who invested in the "new" KCB Rights in 2004 have made good money.

Banks will & should only lend if they are secured loans OR they get a premium for the risk. Banks will lend unsecured to BLUE CHIPS with strong balance sheets like KQ, EABL & BAT.

Don't blame banks for protecting their assets & shareholders. Go after the nincompoops who ran down Uchumi (KShs 500 Million in cash + full shelves in 2000 when Suresh Shah "retired") in 5 years with negative cash + empty shelves!

Ask if haco+kirubi+friends got sweet deals as suppliers?
Who owns the stores that Uchumi is leasing?
From whom did Uchumi buy the land to build new stores?
What fees were paid to consultants?
Who are these consultants?
Who managed HR for Uchumi?
What info was hidden during the Rights Issue?
Why didn't they raise more funds to really help shore up Uchumi's finances?
Who sold their shares AFTER they knew Uchumi was going to close?
Insider trading?
Suspend & investigate all trades/sales during the last week of Uchumi's life.

bankelele said...

sassy: hope to be there

gathinga: Government plays its hand - The Minister of Trade has now fired the ICDC boss, formed a probe committe and invited the kenya anti corruption commision to inevstigate uchumi

Also another mercenary shocker (http://www.nationmedia.com/eastafrican/current/Opinion/comment1206069.htm) - they attended Museveni's inauguration in the company of a Kenyan cabinet minister!

Anonymous said...

If debtors get priority, why are the banks hogging all the loot when suppliers hold the bulk of Uchumi debt? Shouldn't the banks have enjoined the suppliers in the receivership plans? With the lightning speed the decision to dispose of Uchumi was made, I can't help but read something very fishy in this saga.

Ken said...

The procedure for paying of debtors during liquidation is:
1. Those owed wages, including holiday pay
2. Certain payments to the Inland Revenue Department (for example, PAYE)
3. Secured creditors
4. Unsecured creditors
5. Preferential shareholders
6. Ordinary shareholders.

bankelele said...

Vituvingisana: Agree that Banks are being unfairly blamed - yet it appears that it is directors who threw in the towel (not banks that shut down uchumi). Also that the people who ran Uchumi from 200 to 2005(board & management) have some serious questions they should answer

Ken: In some cases city council and lands boards can jump the debtors queue over unpaid land rates

Also I doubt if there will be anything for shareholders to salvage - Uchumi has high, perhaps unrealistic expecations from the store sale (http://bankelele.blogspot.com/2005/09/pot-pourri.html)

gathinga said...

this bein the procedure for payments in the event of liquidation, ordinary shareholders cannot possibly get anything in the event. the other creditors are owed much more than the assets can fetch in a 'normal market'

Kagz said...

@ vituvingisana,

Is this a Comment/ Email/ Research Project questionaire/ Post Mortem or all the above :)

N'way, well written. Very objective.

Uchumi's downfall discounts the stock exchange all time favorite... "the more risky an investment, the higher the return"

Just like the Godfather of investing (W.Buffet) said, "i only invest in things i undertand" and NSE is not one of them.

VituVingiSana said...

Thanx guys & gals for your kind remarks.

@Ken - Nice summary. Reminds me of a study book by Chaurasia. Lecturers hated it coz it simplified the subject!

@Bankelele - No, I don't think USL shareholders will get anything. By the time the banks, tax man (unpaid VAT), lawyers (Ken, u missed these guys!), jackals & vultures have been through the remains there will not be anything left.

@kagz - Ur too kind! All the above. Next a eulogy!

WB also said "When others are ferful be greedy, when others are greedy be very fearful"

@Anon - The call for a Chapter 11 style bankruptcy law allows the creditors (incl banks) to run the show while protecting the assets. Current (outdated) laws do not contemplate a Chapter 11 scenario.

Time permitting, I will write up on the possible scenarios over the weekend on a Chapter 11 scenario. Check on Tuesday on www.coldtusker.blogspot.com

Anonymous said...

On a digression: you mean some people have notbeen refunded their KenGen cheques all this while? What is it with Equity Bank? This Bank has glaring management weaknesses. I have been reading the column below for the past three weeks and the complaints about KenGen refunds are legion, with Equity being the main culprit.

jenny said...

Earning money has online never been this easy and transparent. You would find great tips on how to make that dream amount every month. So go ahead and click here for more details and open floodgates to your online income. All the best.


Related Posts with Thumbnails