The Chief Executive Officer of Jamii Bora Bank (JBB), made a rather querulous assertion a few weeks ago while addressing shareholders at the bank’s annual general meeting on the subject of the Uchumi Supermarkets investment, where JBB together with an affiliate firm increased its shareholding in the supermarket to 15.8%. An article in this newspaper on June 7th 2016, quoted the CEO, Mr Samuel Kimani as saying:
“As a listed company, we got the transaction approved by all regulators but the information memorandum was a work of fiction, it did not reflect what we found there. We feel cheated because unlike a private company where you do due diligence, a listed company you depend on the information memorandum provided.”
Banks are not supposed to be in the business of business per se. Section 3.4.1 (b) of the Guidelines on Prohibited Business contained in the Central Bank of Kenya Prudential Guidelines states that the Banking Act prohibits an institution from acquiring or holding, directly or indirectly any part of the share capital of, or otherwise have a beneficial interest in any financial, commercial, agricultural, industrial or other undertaking, where the value of the institution’s interest would exceed in the aggregate 25% of the institution’s core capital. At the end of that particular financial year 2014, JBB’s core capital stood at Kshs 2.196 billion. It could therefore make an investment of up to Kshs 549 million in Uchumi. But why Uchumi, which did not demonstrate obvious strategic synergies? The same newspaper article quotes Mr. Kimani’s rationale: “He said while acquiring another bank would have been a costly affair, Jamii Bora concluded that the Sh500 million investment was a small price to pay. He said the bank decided to take up Uchumi which offered an opportunity to access 800,000 more customers, a supply chain of about 2,000 suppliers as well as 40 extra outlets when Jamii Bora bought it.”
The size of the half a billion shilling investment would mean that JBB qualifies as an institutional investor in financial investment-speak. Uchumi had said in its Information Memorandum (IM), that the gross amount it was seeking to raise was Kshs 895,814,820. By making an investment of Kshs 500m, JBB was essentially targeting about 56% of the total targeted issue. Essentially JBB’s CEO could call the Uchumi CEO on phone and say “Hey buddy, we need a long look at your books and operations. We need to kick the tyres and see if this thing moves.” Meanwhile, back at the head office ranch, the JBB CEO would have a team of analysts crunching through the audited accounts of Uchumi, comparing these to local and international peer financial numbers, poring over stockbroker analyses of past Uchumi performance, as well as undertaking background checks on the company with its core suppliers. That’s pretty much what institutional investors do, in addition to interrogating management on past performance and future outlook. So I downloaded the offending IM from Uchumi’s website and cottoned onto the interesting numbers in the table attached. The numbers were in the Reporting Accountant’s Report attached to the IM, which was Ernst and Young (EY). The numbers are not the picture of a blushing young bride. In four years, supplier debts had almost doubled, the company had moved from a negligible overdraft of about Kshs 9 million to Kshs 730 million and loans had increased by a factor of almost seven. It is also apparent that the buying patterns had shifted as the non-food inventory had also grown from Kshs 185m to Kshs 768m. Were these high value but low volume stock items that were now tying up cash?
The same offending IM reveals thus in Section 16.1: “The Uchumi net current liabilities as at June 30, 2014 were negative KShs 1.1 billion. However, this is in keeping with the global retail industry trends as all retailers leverage on short-term working capital financing by suppliers. In Uchumi’s case, this was more so due to the fact that Uchumi opened eight (8) new branches between October 2013 and June 2014. As a result, suppliers variedly agreed to change trading terms in the interim as a means of supporting the new branches which had not yet matured. Credit limits and days were therefore temporarily adjusted by major suppliers and the average creditor days moved from an average of 45 to 65 days.”
That was a seemingly innocuous statement save for the fact that further down the lonely road to the Reporting Accountant’s Report, EY – who didn’t do a creditor’s aging analysis yet undertook a robust debtor’s aging analysis in the same report – stated that trade payables are non interest bearing and normally settled within 60 days. That’s a red flag right there. The supermarket says that there is a deterioration of its creditor days but the Reporting Accountant fails to do an aging analysis and sings the party tune about normal settlement times. This should have made the JBB analysts pick up the phone and start talking to suppliers to find out what the true picture was. Finally, the IM had a whole fairly insipid section dedicated to the Uchumi risks. Ten risks were identified, the most interesting one being risk number 7 titled Competition/Crowding. There was absolutely NO mention of any of the existing competitors by name, estimated sales or branch footprint. In fact, the IM tepidly posits that the mitigant: “As a policy the company does not open stores in locations that are in close proximity to other Uchumi outlets and does not therefore cannibalise their existing stores.” The IM in totality raises several questions on the historical business case of Uchumi and warranted a fairly robust and extensive due diligence before any shilling was disbursed on closure date.
It is actually quite disingenuous for any institutional investor to claim that they relied solely on an Information Memorandum to make an investment decision equating to 22.7% of their core capital. That’s the stuff that fairy tales are made of.
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