KQ shareholders against a wall in new turnaround plan

Kenya Airways Board Chairman Michael Joseph flanked by CEO and Managing Director Mbuvi Ngunze (centre) and Group Commercial Director Vincent Coste during investor briefing in Nairobi for the company's full year performance for the period 1st April 2016 to 31st March 2017. (Photo: David Njaaga/Standard)

On the eve of the General Election, some shareholders of Kenya Airways (KQ) will be staring at  near-worthless stock after being put through a painful process to reinvigorate the national carrier.

Ordinary investors, who own 24 per cent stake, will have their shareholding reduced to 1.24 per cent to make way for 11 banks, accommodate more Government stake and shoulder KLM’s significant position in the airline.

In fact, many of the more than 78,000 small shareholders may not have a say in the decision to dilute the value of their shareholding by 95 per cent.

Being the eve of a tense election, it is unlikely that those living up-country will take a bus to KQ Pride Centre in Nairobi that Monday morning to vote on the resolutions.

They have the option of selecting a proxy but then the rules of the game have been changed to ensure the restructuring will not be stopped by any of the disgruntled shareholders.

According to the altered terms published by KQ, the extraordinary meeting will take place as long as two representatives attend.

The National Treasury and Dutch partners KLM, who are backing the deal, have a combined shareholding of 56 per cent and could as well be the only ones in the room.

“The quorum for all business to be transacted at any general meeting has been changed from three to not less than two persons holding or representing by proxy at least one-third of the nominal amount paid up on the issued shares of the class,” said KQ Chairman Michael Joseph in a circular to shareholders.

And for those who turn up, the special resolution will be passed if not less than two thirds (75 per cent) vote in favour of the resolution.

Restructuring is expected to reduce the company’s Sh242 billion gross debt exposure by approximately Sh51 billion, increase the amount of cash available to the business and ensure ease of implementation of the numerous transactions needed to deliver a successful turnaround.

The new bosses at the helm are frank with the shareholders that KQ is out of options and that they should either take a haircut (more of decapitation) or lose the airline altogether.

“The company will no longer be able to service its debt obligations as they fall due and it is unlikely to continue to be in a position to operate as a going concern,” said Mr Joseph.

He added that shareholders would be unlikely to see any return on their current investment and the company would enter into formal insolvency, with its shares no longer traded on the securities exchange.

If the airline is forced to invoke the Insolvency Act 2015 and seek protection from its creditors, the consequence would be a considerable disruption to its operations and destruction of value.

Liquidity relief

And if a creditor manages to wind up the carrier, this would mean that the secured lenders would have the ability to repossess KQ’s fleet of aircraft, which are critical to the continued operations of the company.

“However, if the restructuring is successfully implemented, the liquidity relief achieved will assist the company to continue to trade as a going concern, a positive equity value is expected to return and there could be increased investor interest in the company,” said Mr Joseph.

To soften the blow on the small shareholders, KQ is offering them an exclusive rights issue in which they will be invited to shore up their investments for up to Sh1.5 billion after the restructuring.

If they take up the offer, the ordinary shareholders will get a paltry five per cent, albeit of a good company. KQ says it will use the additional cash raised through the open offer to further reduce debt and fund its operations.

In March 2014, Kenya Airways ran a promotion where a sticker could get you a seat on its elite Dreamliner plane acquired under the Project Mawingu expansion programme.

“Those with the #KQDreamliner sticker, enter your serial number here for a chance to win a seat on the Flight of a Lifetime,” a social media post on the airline’s Facebook page dated March 22, 2014 read.

A year later, the company was counting record losses of Sh26 billion and has since not crossed back to profitability.

The airline struggled to explain to shareholders how the expansion programme, touted for its six Dreamliner aircraft with sophisticated engines which cut fuel consumption by 20 per cent, could go so wrong.

It later said an Ebola outbreak in the lucrative West Africa route and decline in tourism as a result of terror attacks in East Africa left the company with idle planes, which were bought on huge debt that was attracting sizable interest.

Fraud and collusion

An audit by Deloitte also cited weak controls, fraud and collusion, including Sh61.1 billion lost after seven million tickets were issued below seat cost between 2012 and 2015, and Sh2.2 billion through incorrect billing and allowance of excess baggage.

The backlash saw a major turnover in management that only spared Chief Executive Officer Mbuvi Ngunze, who quit in March after two years at the helm but remained to offer advice on the restructuring.

In the new plan, the management is so optimistic that it believes KQ shares will soar above the current Sh4.60 price at the Nairobi Securities Exchange, and that the small shareholders will get a discount when topping up their stake.

“It is expected that the price per Open Offer Share will be at a discount to the post-restructuring prevailing market price of the ordinary shares,” said Mr Joseph.