What you - may - need to know. Q & A on Actis selling its stake in Umeme

So there has been all this talk about “Umeme on sale,” if the Uganda’s leading newspaper is anything to go by. The headlines then changed to “20 firms interested in Umeme.” Kindly shrug that number. What matters is who eventually buys the shares in Umeme. So what’s the story? Here is my attempt to break down what this is all about.

Who is selling what?

Actis is the single largest shareholder in Umeme Holdings – domiciled in Mauritius. Umeme Holdings owns 60percent of Umeme Limited, which is Uganda’s largest power distributor with about 500,000 customers. Actis until November 2013, owned100percent shares in Umeme Holdings. On November 30th 2013, about 38percentshares of Umeme were floated on the Uganda Securities Exchange. Actis has now made the decision to sell part of the 60percent in Umeme to variousshareholders. So yes, Umeme is on sale, but not all of it. Still it is a sale.

Read: How Actis minted billions in Uganda, from just two companies

Who is selling what to whom? 

My guess is as good as yours. I do not know. NSSF perhaps? IFC? Who could it be? Norfund. I do not know. There are quite a number of potential investors that can buy up the shares ranging from pension funds, investment banks, sovereign wealth funds and "others." 

"Due to corporate governance restrictions, Umeme  cannot comment further until the transaction has been completed," a statement from Umeme reads. 

Why is Actis selling - part  of - its shares in Umeme Holdings?

Actis is aprivate equity firm. It invests, grows the business and sales to the highest bidder[s]. Then it will move on to the next country and do the same for any other business. In 2012, it divested its entire interest in Banque Commercialedu Rwanda. In 2013, it also sold a 45.05percent stake in Dfcu Bank, Uganda sixthlargest bank by assets. It previously held a 60percent stake in the bank. On this transaction, Actis sold the stake at 119billion Uganda Shillings to NORFUND and Rabobank. There seems to be a similar arrangement with Umeme, considering that Actis will still hold a minority stake in the company.

It also exited Xiabu Xiabu, a Chinese restaurant chain and XP Investimentos a brokerage firm in Brazil.

Actis has been busy since it sold a stake in Umeme, Dfcu and BCR. It acquired Compuscan,” the largest independent credit bureau in Africa.” Compuscan is headquartered in South Africa and in Uganda; it provides the famous financial card required by all commercial banks before you take-out. The takeover amount was not disclosed.

It also made a 36percent equity investment in the AutoXpress Group, a tyre company in East Africa that distributes Pirelli and Dunlop brands among others.

In 2013 it also invested perhaps the largest chunk of money in Cameroun. At $220m, it acquireda 56percent stake in Cameroun’s national grid company, inclusive of two independent power plants.  It also went into the pharmaceutical industry in India, when it bought a stake in Symbiotec Pharmalab Limited (“Symbiotec”) at US$48m. It also spent US$95m on one of South 

Africa’s largest payments company, Paycorp.

Other acquisitions include Upstream, a mobile marketing and e-commerce Company and Jiashili Food Group, a Chinese Biscuit manufacturer.

Has the sale got anything to do with parliament adopting the proposal to terminate the concession?

Tough question, huh? Well it depends on how you look at it. The first divestment came at a time the whole ad-hoc committee on the energy sector was debating the contract of Umeme and Eskom. The second divestment comes at a time when parliament has adopted the recommendation for the Umeme contract to be terminated. A decision by cabinet has not been made, but considering the submissions made by Irene Muloni, the energy minister at the time of the debate, the concession is going nowhere.

My understanding is even if Actis partially exits, the concession that would be cancelled is one made with Umeme Limited, so either way, government can still terminate - if it makes the decision. Government would still compensate Umeme Limited investors for the termination of the contract. Still a win for investors!! Whoever they will be!!

Does the Actis exit have any implication on the share price?

Well, trading of Umeme shares has been suspended for now as the transaction is concluded. The reason trading is suspended is one to avoid some “insiders” from hiking or downgrading the price. [You need to read the book: The Last Tycoons:The Secret History of Lazard Frères & Co. It provides some good insight on mergers and acquisitions of listed and non-listed companies.] If the price goes up, then it works in favor of Actis and if it falls, whoever is buying gets a juicy deal. This is not unprecedented. In 2013, trading of Dfcu shares was suspended to allow the completion of the Actis, Rabobank and NORFUND deal.

The Dfcu shares were trading at shs1,000 per share then. Currently they’re trading at Shs1,215 per share, a Shs215 rise since mid-2013. Umeme’s share price is currently Shs360, up from Shs275 at the time it went public. One cannot predict the share price of company, but what the USE has proven to us is that if the fundamentals of a company are right, the price will rise or remain stable. If the fundamentals are wrong, then investor confidence is dented, take for instance what is happening with Uganda Clays and NIC [It is currently recovering, although it is still trading below IPO price].  

It should be noted that institutional investors hold the largest chunk of shares of USE listed companies. If they sneeze, the price could dip or rise. For now, the political chatter on Umeme is not moving them just yet.

What is Umeme worth?

My conservative calculation of Umeme's value is Ugx584.5bn [No of Shares x Current share price]. The Actis ownership is 60 percent, which is about 975.6 million shares valued at Ugx351bn. If, Umeme were to remain with a minority shareholding, say 15.5 percent after selling 44.5 percent, it could make close to Ugx300bn tax-free money. [This is speculation. Just to point you to you the potential valuation of Umeme and the sale.]

Remember, Actis lent Umeme about Ugx47.6bn between 2005 and 2007. By the time the loan repayment was complete in 2012, Actis had received an estimated Ugx92.7bn. This added to the dividend of Ugx14.2bn in 2013, then you can see why Umeme was a fine investment for Actis. 

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What does this mean for the electricity user in the country?

Well, hard to say. That depends on the investors that are coming in and their vision for the company. Power supply is still somewhat erratic and what Ugandans need to know, is whether this will reduce. Will the tariff reduce? Does Umeme’s image change? Well, no to all of these. First of all, the change in investors could bring in some new faces on the Umeme board, which perhaps could change the strategy of Umeme – or not. Power supply to improve will depend on whether there is commitment to invest in improving infrastructure. 

Umeme recently took-out a loan of US$195m from the IFC, Stanbic and Standard Chartered for capital investment. It also requires close to $300m for investing in rolling out pre-paid meters to the whole country. If you’re experiencing poor power supply, it is likely that would remain the same.

How does Uganda benefit from this transaction?

Wait, before you say Capital Gains Tax will be paid. In 2011, there were amendments made to the Income Tax Act. One of them was that any sale of assets in a Private Limited Liability Company, the company that has sold will be subject to a Capital Gains Tax assessment by URA. This, if you remember is a subject of two major legal battles between URA and Heritage Oil over the sale of its assets to Tullow Oil. The other one is between URA and Zain, which arose out of Bharti Airtelacquiring Zain’s assets in 2010.

Umeme is a publicly traded company listed on the USE. The rules are different. Actis, which will be selling is not subjected to Capital Gains Tax. CGT was not applied when Actis sold Dfcu shares to Norfund and Rabobank. Government opting not to impose such a tax share transfer of listed companies was mainly to encourage the growth of the capital markets.

Notably, the benefit for Uganda is that it makes it a fertile ground for FDI. It is rather comfortable for a company to know that it can come invest in Uganda and then exit at will by selling to other investors. Some of our brokerage firms and law firms, will also have a share of the pie when the bill their clients.  

When the top six banks sneeze, the entire banking sector catches the cold

None of the top six banks posted losses. There was “just” a decline in profitability. They still made money. Inside the boardrooms however it’s a whole different story. The CEO’s have questions to answer. How to turn around a less than impressive year? 

The top six banks are Stanbic, Standard Chartered, Crane Bank, Centenary, Barclays and Dfcu Bank respectively. The top three saw their profits dip by 22.11%, 26% and 41% respectively to Ugx101.8bn, Ugx97.6bn and Ugx47.2. The other three, recorded a rise in profits by 3%, 4% and 5% respectively to Ugx58bn, Ugx39.8bn and Ugx34.8bn. The top six banks account for at least 82% of the entire banking sector net profits.

 In 2012 profitability of all commercial banks was Ugx586.5bn. This dropped by 21% to Ugx462bn in 2013. The top six banks account for Ugx379bn – 82%  - of the entire commercial bank profits.

The trouble for these banks was slowed operating income if compared to 2012. In 2012, the top six’s’ income had grown above 15% however in 2013, none of the banks had above 15% growth in income. In fact for Stanbic and Standard Chartered Bank, income fell by more 12% and 14%. Overall the entire banking sector recorded a 19% decline in income to Ugx1.9trillion. It should be noted that the top six contributed at least 81% of this income.

The less than impressive income by banks was mostly as a result slowed growth of money they make off lending. In 2012, interest income was surging with only Dfcu posting a rise of less than 11%. The rest were above 18%. Despite Stanbic Bank and Standard Chartered being diversified, their non-interest income also did not grow as well as it usually does.

The banks blame the economic environment as being unfavorable. Philip Odera, the CEO Stanbic Bank says banks still had to deal with the effects of the 2011 rise in interest rates, which led to an increase in loan defaults and provisions for these bad debts. Even at Bank of Uganda they admit the less than impressive performance of the sector was due cautious lending by banks and the poor performance of the real estate sector.

Expenses also grew and more notably were expenses to cover-up for the bad debts that were written off. The provisions grew by 34.8% in 2013 down from 157.4% in 2012. The top six banks accounted for 60percent of these provisions, with Standard Chartered Bank, Stanbic Bank and Crane Bank accounting for Ugx46.6bn, Ugx50bn and Ugx44bn respectively.

In terms of market share – calculated using deposits – the top six hold 63% in 2013. With the exception of Centenary, Dfcu and Barclays, the rest of the top six lost a market share. Stanbic’s share dropped by 3%, Standard Chartered also lost 1.2% and Crane Bank also declined by 1.4%. The slip up by these banks means that KCB, DTB, Ecobank, Imperial, Tropical, ABC, Housing Finance and Cairo International Bank increased their market share by at least 0.5%. The top six still control the largest chunk of banking assets, despite the 1% drop in their market share to 64%.

The implications of this less than impressive means that income tax contributions from commercial banks also declined by more at least 13%.