Merali’s Midas touch

By Kenneth Kwama

Could the sprawling business empire of Naushad Merali be crumbling?

This is the question quietly doing rounds in business circles, as it emerges that one of his bastions — Kenya Data Networks (KDN) — is beset with financial difficulties and shareholders could be preparing to fire its entire management team.

Naushad Merali

KDN’s managing director Rikus Mattyser has barely lasted one year on the job. It even seems unfair to blame him or his management team for the firm’s perceived financial difficulties, but the fact that Merali has over the past four years sold substantial portion of the company he virtually owned to Allied Technologies Ltd (Altech) of South Africa shows a trend that has become a hallmark in his business dealings. Sameer ICT— a subsidiary of Merali’s investment vehicle Sameer Group — owned 96 per cent of KDN while the firm’s former managing director, Kai Wulff held a four per cent stake, until 2008, when Altech bought a 51 per cent share in the company. Sameer, which is named after Merali’s son, offloaded more of its shares in KDN last year.

Smart move

Altech bought the shares and increased its shareholding to 60.8 per cent. Incidentally, KDN announced a pre-tax loss of close to Sh170 million for the year that ended February last year.

The question is: Did Sameer cash out to limit the impact of KDN’s perceived dwindling fortunes on its balance sheet, or it was a case of Merali’s diminishing options?

"I don’t think it is his empire crumbling. Merali is a suave business mind. He is simply making a smart business move. This is what he did with Eveready and Celtel. His empire is so vast, this wouldn’t dent it in any way," says the director of an investment bank in Nairobi, who requested not to be named because his firm handles some of Merali’s investments.

The idea of offloading substantive shares in companies that are seen to be performing well, but whose fortunes start to dwindle immediately thereafter is a trajectory that mirrors just about every element of Merali’s business interactions.

He has often pulled some of the smartest business moves in corporate Kenya, but the deal that made him newspaper fodder happened in March 2004 and could as well go into history as the largest profit ever made by an individual businessman in the shortest time possible.

The out-of-the-ordinary deal took place when an executive from French mobile firm Vivendi, which was Merali’s co-shareholder in then Kencell flew down to Nairobi to inform him that they had signed a contract agreement to sell their 60 per cent stake to MTN for Sh18 billion. At the time, MTN was said to be so confident about clinching the deal that they even leaked out stories to the South African press about the same.

Merali was not happy with the South Africans and by virtue of the fact that he owned 40 per cent of Kencell he had pre-emptive rights to buy the shares from Vivendi. But he couldn’t raise the Sh18 billion MTN was willing to pay for Vivendi’s shares in Kencell.

Negotiation round

Somehow, he got into an arrangement with Mo Ibrahim who owned Celtel, got a loan and acquired Vivendi’s shares at Sh400 million more than what MTN had offered. He paid Sh18.4 billion ($230 million)— calculated at then dollar price of Sh80 at around 7.00pm of the material date. He now owned 100 per cent of the company.

But as he was finalising the deal with Vivendi, the Celtel group was waiting in another room. After buying the shares, Merali and his team rushed to meet the Celtel team led by Mo Ibrahim for another round of negotiation.

According to past reports, two hours after sealing the Vivendi deal-at around 9 pm to be precise, Merali sold the shares to Celtel for Sh20 billion coming out with a cool Sh1.6 billion profit.

Such is the genius of Merali, the man variously referred to as Kenya’s Donald Trump-because of his business acumen that many have likened to the US investment mogul’s style.

"He rarely makes business mistakes," says the investment banker.

"The lesson corporate Kenya should learn from his past dealings is that when you see Merali selling, there could be fire on the mountain. You’d probably be advised to think twice before you buy because those who’ve bought from him in the past did not succeed with those businesses."

He gives the example of Eveready batteries where a firm associated with Merali reduced their stake from 51 per cent to 35.1 per cent during the firm’s Initial Public Offer (IPO) about five years ago.

Investor hopes

The battery maker was profitable by the time of the issue. From a modest profit of Sh186 million ahead of the November 2006 IPO, the company returned a loss of Sh54 million after-tax in the six months ending March 2007 to dim investors hopes.

Today, that kind of profit level for Eveready has all but turned into a mirage as the firm reportedly mulls over sustainability of its operations.

According to our source, the only exception so far to Merali’s art of disposing off companies that don’t do well is East African Cables, which he bought in October 2000 from Delta Group Plc of UK, which wanted to get out of Kenya.

He bought out Delta’s 75 per cent equity in the company for a reported Sh6.8 per shares, which amounted to a total of Sh104 million.

In late March 2004, Merali sold off the company to local investment group, Transcentury for Sh15 per share — a total market purchase price equivalent to Sh230 million. This arbitrage opportunity netted Merali a cool profit of Sh126 million.

Although the events of the past few years could be indicative of a trend, the jury is still out and suggestions that Merali’s business empire is taking a nosedive could be premature.

Merali still owns a large business empire managed under the Sameer Group.

He is involved in diverse economic sectors including agriculture, construction, energy and power.

He also has diverse interests Export Processing Zone (EPZ), Information Technology, telecommunications, finance and transport.