Reading the Tea Leaves at KPLC

The on going rights issue closes on today (22/12/10) after a month and a half of the balance sheet restructuring program.

Background: CEO Joseph Njoroge said its necessity began with the 1999-2002 power-rationing period when the company incurred heavy trading losses of Kshs 15.9 billion. The debt was converted into equity for the government (GoK) and preference shares for the government and what became Kengen – and which Kengen transferred back to GoK prior to their IPO.

Preference share burden: There was a five-year moratorium on dividend, but the preference shares have continued to be perceived by lenders and investors as debt - with fixed annual payout. This distorted the value of ordinary shares, creditworthiness of KPLC, and would be a burden on cash flow to meet as seen when the moratorium ended with a payment of Kshs 1.25 billion ($15.6 million) to holders of 7.85% preference shares in 2010

New balance sheet will have a level playing field and enable the company to access more funds after the redemption of preference shares in three steps by (i) issue of 76 million new ordinary shares (ii) ordinary share split 1 to 8 (iii) a (December 2010) rights issue to shareholders entitled to buy 20 new shares, for every 51 they own, at a ~20 per share with GoK renouncing its rights – to raise a net amount of ~Kshs 9.1 billion ($114 million)

Underwriter: KPLC sought an underwriter and got Centum and Equity Bank to underwrite the issue by 50%.

Retain GoK control: from a current 40% ordinary shareholding, GoK stake will 69% for short period, but as they are renouncing their rights, on conclusion it will be 50.1% and still remain a parastatal. GoK can also ‘count on’ no.3 shareholders – the National Social Security Fund who own 8%