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. 

www.goldroof.net

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.  

On Umeme: let’s get back to the basics

It is the last day of November – 30^th to be exact – in 2012. The sun is finding its way through the clouds. We are at the Sheraton Kampala Hotel. The same Hotel where everything was "Kwisha" in 1981. Fast forward to 2013, I once got served milk that had gone bad. I abandoned the cornflakes. Well, on this November day, Umeme had treated us to breakfast and a host of speeches. It was on this day Umeme got listed on the Stock Exchange. And yes, the trading floor was temporarily moved to the Sheraton. “They have been bought off,” they said. “Why are they not telling us the issues? Umeme is cheating us?” they added. Oh well, I wonder how breakfast could be a form of buying us off? But the company got listed, the first since 2009. The price has since appreciated by 36percent and now a share is worth Shs365. Good for the company and good for the USE. Such days are rare for the USE. 

xxxxxxxxxxxxxxxxx

The generators blare on. Downtown Kampala, traders along Nasser Road are listening to their Radios. Later in the evening they will watch NTV and on Newsnight, Andrew Mwenda will be talking about “daft MPs” trying to get the “Umeme contract cancelled.” We suffer from "lack of intellectuals" to analyse issues, he will say. The Umeme concession is in its 8^th year – of 21years. When MPs made recommendations after an adhoc committee report on the electricity sector, one of them: terminate the Umeme contract as they claimed it was signed in bad faith. We got a bad deal. Additionally, Umeme lied. In defense of Umeme – and partly, I agree – Mwenda notes that Umeme has not breached any of the concession terms and in fact continues to invest in Uganda, achieving the targets set for it. They recently added a Shs485bn loan deal from IFC, Stanbic and Standard Chartered for further investment between 2015 and 2018. 

Yes the concession agreement is complex. You'd have to breakdown the key issues, one by one, including taxation. So let’s deal with the basics. Umeme is inefficient – sometimes. Bills are still estimated and the generators are dominant. In Kampala, we lack a smart grid. Sometimes the slightest of winds – even before the rains – we are plunged into darkness. They’re “trying to fix” the grid. It is not that easy – they say. Western Uganda is now expected to experience more than four months of load-shedding as the grid is upgraded. But what do we want? Electricity! Efficient supply of electricity. Where did all this start? Uganda Electricity Board (UEB) used to be the power distributor and generator. We had daytime and nighttime load-shedding. It was inefficient. It had suffered from elite capture. The same “elite” still running some of electricity bodies like UETCL, UEDCL and UEGCL – all replaced UEB. All these companies have a role to play in the energy sector. It is complex. UETCL undertakes most of the high level projects on behalf of government. If the transmission lines are inefficient, we have the right to blame them. 

We delayed power projects yet more people were added on the grid. Bujagali delayed. We blamed butterfly activists and Ken Lukyamuzi. Then desperately to keep our lights on, we brought in thermal generators – at a premium. Government decided to subsidise the tariff. Bujagali “went live” in 2012. We had excess electricity, an "un-smart" grid and an ad-hoc committee report. The company went public, the investor, Actis got back about Shs92bn returns on loans for “upgrading” the systems since 2007. 

With Bujagali and ESKOM – running Kira and Nalubaale – they want a power distributor that can make collections for them to get paid. The lending arm of the World Bank, IFC, and Germany’s KFW etc… are all investors in Bujagali. IFC is also a lender to Umeme and holds a 3percent stake in the company. IFC wants a return on the money invested in Umeme, they also want to make money from Bujagali. One Bujagali official notes that they prefer Umeme as a distributor, that way they get paid on-time to avoid creditors knocking on their doors. The pressure is on Umeme and Ugandans. If we generate more power, where does it go if we lose 24percent of it? Well, the tariff. We are going to have another huge Dam, Karuma. The Chinese will build and finance most of it. If you think the tariff will drop, well, unless UEB makes it back. To pay for all this energy, the tariff is likely to edge higher. If we get more industries, then, maybe then we won’t pay that much. So even with the tariff, Umeme has to collect the money. They have improved that to 94percent -2012. Then comes in bill estimation!! There is a planned roll-out of prepaid meters – already for some people in Kampala these meters can be seen. They are mandatory, you either get one or get abused by a sub-contractor. The roll-out for the whole country is expected to cost USD300m. Who will pay for it? You. While we pay our bills, some government agencies default. Remember what became of Uganda Airlines? The government racked up a bill that they didn’t pay, sometimes. This cost the airline and it is partly why it went under.  

Point here is, yes we need the FDI, but Umeme’s is not doing charity work, neither for themselves nor for us. We have to keep asking the questions, no matter how “stupid” they sound. If we stop asking, then who will, yet we are the ones who pay the price. If the elite can’t explain the basics, then who will? If they assume, “yeah, Ugandans suffer from lack-of-intellectualism-so-let-us-ignore-them” then how do "they" expect the apathy to go away? The more we discuss Umeme, the more open they become. A Ugandan SME needs efficient supply of electricity. 

XXXXXXXXXXXXX

The first thing any business reporter who wants to write about the stock market is told is: “buy shares.” That way you’ll understand how our small stock exchange works. So that way, you become an investor, sometimes, you forget you're a journalist. So yes, despite the "machinations" about Umeme, the demand for the shares of the company has been on a rise.The reason: Institutional investors. Institutional investors, mostly offshore [Mauritius] seem confident. Umeme Limited, Uganda, is 60percent owned by Umeme Holdings - managed and owned by Actis. For one,it has most sophisticated tax arrangements. The holding company that owns Umeme is domiciled in Mauritius [tax haven]. Prof. Guttorm Schjelderup calls this [tax havens] a facilitator of “sophisticated tax planning.” It is a listed company. Disclosure is not problem. Olympus is a listed company in Japan. Enron was listed on the NYSE. Listed banks have rigged Libor, been fined and the world moved on. 

Africa is rising. Ask the Investors!!! How Actis minted billions in Uganda, from just two companies

Private equity exits in Uganda are rarely heard of, large ones at that. Actis, a British private equity firm, came to the forefront in Uganda in 2005 as it came in to manage a portfolio of assets run by the Commonwealth Development Corporation (CDC). In 2012, Actis begun a partial exit from Uganda – exit is not a word they like to use though – after selling a 38 percent stake in Umeme by taking the power distributor public. Later in 2013, May to be exact, they sold a 45 percent stake in Dfcu Bank, Uganda’s sixth largest bank. Actis in its partial exit from Ugandan companies’ has exhibited the country as fertile ground for investment returns.

The Umeme shareholder loan
Umeme at the time of listing was valued at $178m, of which $66.73m or 38percent was sold to the public through an IPO in November 2012. The eventual listing, as Actis’ Tashi Lassalle notes was meant “to allow retail and the people of Uganda to invest.” She adds, “From our experience the ownership of a national utility company by domestic customers model works well...” On the other hand, however, Umeme had a debt burden, not that big though, but one where it was forking out interest payment of 12percent. Close to US$27m or Ushs66.9bn was the outstanding balance of this shareholder loan to Umeme Ltd, from Actis through a holding company called Umeme Holdings in Mauritius. The IPO was meant to raise money to pay-off the outstanding balance of this loan.

Essentially the accounting geniuses at Actis insist they have not taken any dividends out of Umeme’s profits since 2005, at least until it went public and posted a profit at the end of 2012. Shareholders carefully structured a loan to Umeme, which they say had a high interest bearing. In fact, they concentrated on building a pool of retained earnings, now at Ushs141bn from a partly Ushs42bn in 2007.

“...the Company has not paid dividends since its inception, although Umeme has paid an increasing level of shareholder loan interest for the past three years as a means of distributing cash to shareholders,” reads the Umeme IPO prospectus. At 12percent interest, Umeme shareholders, since 2009, got paid. Furthermore, interest on a loan has to be paid despite the performance of the company, in this case, the loan carefully hedged shareholders against non-payment just in-case the company makes losses. Luckily, the company has only posted a loss of Ushs2.8bn in 2010, since 2007.

The shareholders loan, initiated in 2005, was to cater for capital investments in the utility company, a requirement for the concession. The Umeme IPO prospectus reads that the loan was “....to provide funding to Umeme related to the original target investment of US$65m..... The loan had a grace period of 4 years and repayment of the loan principal was expected to be in 7 equal annual installments effective 2009.” By end of 2011, Umeme was required to have paid back Ushs37.7bn of the loan, but it had only paid a total Ushs25.7bn since 2009. On this capital investment, they were guaranteed a handsome 20 percent return, annually.

At the end of the day, after a shareholder loan injection of Ushs47.6bn in 2005 and 2007, Actis walked away with an estimated Ushs92.6bn – a few billions short of the retained earnings of 2011 - after interest and principle. After posting Ushs57.1bn net profit in 2012, the very first dividend payout totaled Ushs24.3bn [Ushs15 per share]. Actis, through Umeme Holdings has over 975million shares [60.08%], translating into a total dividend payout out of Ushs14.6bn - before withholding tax of 15percent - , another handsome payday.

Furthermore, Actis insists it has created investor value in Umeme as a business. At a recent AGM, the Company Directors noted that they’ll keep continue “...generating sufficient profits to sustain and build the business while providing value to shareholders.” Currently, Umeme is trading at Ushs360 a 23.6percent rise from Ushs275, the IPO price. Value created; Perhaps.

The US$42m Dfcu stake sale
Actis started managing the Commonwealth Development Corporation (CDC) 60.02percent shareholding in Dfcu Bank in 2004. In the same year, Dfcu went public with 30percent stake, as government and the World Banks’ IFC divested their interest in the bank, at Ushs230per share. On the day Dfcu was listed in 2004, the share price surged to Ushs305.

Since then, Dfcu has grown and Actis, is quick to express the investor value created for the last 10years.
“Today, DFCU is the 5th largest bank by assets, with an estimated asset base of US$387m (2012), representing approximately 7% of the total bank assets in Uganda. This represents 5x growth in the asset base – a 9 year CAGR of 18.5% (2003: US$84m to 2012: US$387m),” notes Actis’ Lassalle.

Five months after selling a stake in Umeme, Actis sold a 45.05 percent stake in Dfcu – retaining 15percent – to Robabank (27.54 percent) and NORFUND (17.54 percent). The sell was the largest equity block trade facilitated by the Uganda Securities Exchange (USE) and Actis, sold at Ushs1030 per share, translating into a take home of Ushs111.9bn (US$42m).

From a small time bank, to a big time bank whose asset base had been expanding, the partial exit a handsome return to Actis. Since 2004, Dfcu has posted net profits, the highest being Ushs31.5bn in 2011, and maintained a dividend of policy, on average, of 37percent of profit after tax. Actis, since 2004 has been earning a dividend from the 60.02percent (111,923,594 million shares) shareholding in Dfcu. For instance, between 2005 and 2012, Actis has earned over Ushs21.1bn in dividend payouts – excluding withholding tax. Furthermore, Actis was able to sidestep Capital Gains Tax obligations - on stake sale - to Uganda Revenue Authority, considering that as a listed company in Uganda, it doesn’t apply.

No wonder Michael Turner, Director of East Africa, Actis Capital LLP, notes “this [transaction] was unique in the history of Uganda.” Actis, with two partial exits in Uganda, has shown that there’s a return on investment but only if you are as smart as they are.