How Chinese firms led local cement maker’s shareholders into war

The Savannah Cement factory at Athi River in a photo taken in September 2016. [File, Standard]
Two Chinese firms that formed the initial batch of investors in Savannah Cement may have fooled their Kenyan counterparts, leading them to believe that the firm’s plant in Athi River had a capacity to produce 1.5 million tonnes per year.

In reality however, the plant could only produce about 800,000 tonnes per year.

The cement manufacturer was formed in 2010 with Savannah Heights owning a 40 per cent stake and two Chinese firms, Wanho International and ACME holding 40 per cent and 20 per cent stakes, respectively.

The shareholders of Savannah Heights are Kenyan businessmen Benson Ndeta (35 per cent), Donald Mwaura (30 Per cent) and John Gachanga (35 per cent).

Under a memorandum of understanding signed in July 2010, Savannah Heights was to provide land as well as ensure that the plant had all the necessary legal and regulatory requirements before it started operations.

The Chinese firms would provide the equipment needed at the factory, with agreement being that they would install a plant with a capacity to produce 1.5 million tonnes of cement per year.

Two years after it started operations, the local investors discovered that the plant’s capacity was not 1.5 million tonnes but 800,000 tonnes.

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Following the discovery they confronted Wanho and ACME, who then decided the investment was not worth it and exited the company.

“In all our discussions, agreements as well as communication to the bank and various government agencies, we have been using 1.5 million tonnes as our rated capacity and 1.3 million tonnes as the practical capacity,” reads an email by Mr Ndeta, the Savannah board chairman, in a notice of a board meeting to fellow shareholders on October 12, 2014.

“Having run the plant for close to two years, it is now clear that our actual capacity is much lower.”

Big impact

He said this had a big impact on the company’s profitability, ability to repay loans and to retain its market share in the coming years.

“We need to seriously have a focused discussion and find an amicable solution to the problem,” Ndeta said.

The exit by the Chinese set off a vicious shareholder war that is now threatening to cripple one of the most profitable firms in the cement industry.

Wanho’s and ACME’s shareholding was bought by Seruji, owned by Ndeta, but the transaction is now being contested by the other shareholders of Savannah Heights in a court fight over control of the company.

This might set the firm on a slippery slope that its peers Athi River Mining and East Africa Portland Cement Company have been through after experiencing their own unique challenges.

“Each of the parties in the MOU had an obligation under the JVC. The first plaintiff (Savannah Heights), for instance was to contribute two parcels of land… in Athi River on which a cement manufacturing factory would be built, while the third and fourth defendants (Wanho and ACME) had an obligation of injecting into the JVC all the cash investments necessarily to roll out the plant,” Mr Mwaura says in the court documents.

“This was estimated at about Sh2.2 billion ($22 million). The first plaintiff fulfilled all its obligations under the MOU but the third and fourth defendants have to date never fulfilled part of their obligations and have been and continue to be in breach of the MOU.”

Upon exit of the Chinese firms, the existing shareholders, Savannah Heights, had pre-emptive rights.

In the event that the existing shareholders did not exercise the right, the sale process would undergo another process that would also involve other shareholders.

Mr Gachanga and Mr Mwaura accuse Ndeta of bypassing these processes and, together with the two Chinese firms, orchestrating a buy-out that would leave Ndeta as a majority shareholder in the company.

In the new structure that the two say came without approval by the board of directors, Seruji has the 60 per cent stake previously owned by Wanho and ACME together with 14 per cent that he owns through Savannah Heights. This brings his total shareholding to 74 per cent.

All the shareholders were expected to have a meeting in China to discuss the transfer of shares in October 2014. This aborted and was pushed to December 16, 2014 at Savannah Cement’s offices in Athi River.

While the latter meeting took place and the share transfer discussed, the two shareholders claim that this was never approved by the board.

Mwaura and Gachanga say that despite never having approved the sale, the Chinese firms went ahead to transfer their shareholding to Seruji.

In court documents, the two shareholders noted that “the sale of Wanho’s and ACME’s shares to Seruji was never approved by the board of the first defendant (Savannah Cement). The board was only informed that the sale had taken place.”

The two shareholders also accuse the company secretary of facilitating the sale of the company in an irregular manner, in that though he had not attended the board meeting, he went ahead to prepare an extract of minutes that would facilitate the share  transfer from Wanho and ACME to Seruji.

“Just a day after the December 16, 2014 board meeting, Stephen Mwaniki Njagi who happens to be the company secretary of Savannah Cement, trading as Upeo Registrars, proceeded to extract minutes of the board meeting in complete disregard of the fact that the minutes had not been confirmed and that he had not even attended the meeting so as to know what transpired,” Mwaura says.

“On March 10, 2015 – close to four months after the December 16, 2014 board meeting – I wrote an email to one Ronald Ndegwa, the managing director of the first defendant (Savannah Cement) asking him to email to me ‘the unconfirmed minutes of the December 16, 2014 board meeting’.

“In his response, the managing director indicated that he was currently working on the minutes and  hoped to finalise by tomorrow ‘after which I will share as requested’,” Mwaura says in his affidavit.

Not at meeting

In his affidavit Mr Njagi confirmed that he was not at the meeting but added that this had happened several times where the director would at times meet and later assign tasks to him in line with deliberations that took place at such meetings.

The shareholders also query Sh2.5 billion that Seruji received to facilitate cement trade finance but instead used to purchase shares in the cement company.

Ndeta however says his acquisition of the Chinese firms’ stake was above board, and was made following his two business partners’ failure to raise funds to buy out the Chinese.

He further says that Seruji made an offer to buy out Wanho and ACME after the two companies had exhausted mechanisms provided in their partnership agreement, offering their shares to the existing shareholders and afterwards inviting bids from outsiders.

He adds that the two Chinese firms had in August 2013 expressed a desire to exit the firm, with Savannah Heights having the first right to purchase all the shares as per the shareholding agreement. The directors, according to Ndeta, agreed that acquiring the 60 per cent stake would be in the best interest of SHL and further agreed on the sale price of $15 million (Sh1.5 billion).

The three shareholders would be required to pay $1 million (Sh100 million) as deposit for the Chinese stake and the balance within a month.

“A resolution dated June 16, 2014 was passed, authorising the directors of Savannah Heights to make a cash call for $15 million (Sh1.5 billion) to be paid by Savannah Heights’ shareholders within 45 days of the execution of the sale agreement for the purchase of Wanho’s and ACME’s shares in the company,” Ndeta says in his affidavit.

“Whereas I was always prepared and willing to pay my portion of the $1 million, Mr Mwaura and Mr Gachanga were unwilling or unable to do so. As a result, the said deposit of $1 million was never paid within the prescribed period under the Share Sale Agreement.”

According to Ndeta, after the lapse of the period, the Chinese firms said they were considering offering their stake in Savannah Cement to another company.

Ndeta said he did not want a third party firm “which did not subscribe to the original vision of the company” buying into the cement manufacturer. To prevent this, he instructed Tongoi and Company Advocates to make an offer on his behalf.

“By this time, Wanho and ACME had already received an offer for their shares from a third party and would only agree to sell their shares to me if I would match the offer. I therefore agreed to purchase their shares through my Mauritian Company, Seruji, at the enhanced price of $25 million (Sh2.5 billion),” Ndeta said.

Approved sale

He added that the board of Savannah Cement approved the sale at a meeting on December 16, 2014, noting that even in an instance where Mwaura and Gachanga may not have approved the sale, the other directors – himself and a Li Jinchen who represented four other directors – approved the sale, outnumbering the dissenters.

Following the transaction and the fights, Savannah Cement has gone without a substantive board for close to five years now.

It has an interim board whose decisions are however being challenged by shareholders without representation in the interim board.

Among these include a decision to expand its plant in Athi River, which is expected to cost Sh5 billion.

To bridge the financing gap in its expansion plan, the firm has taken a Sh3.5 billion ($35 million) loan from a local lender, which is also an issue of contention among the shareholders.

The two founding shareholders who have been locked out of the board have objected to the Sh3.5 billion loan that the firm has taken.

Through their lawyers, Mwaura and Gachanga have written to the lender claiming that the loan was advanced against falsified documents including contested board minutes that approved the borrowing plans.

They also accuse the lender of failing to undertake requisite checks on the borrower – particularly the interim board members.

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Savannah CementWanho InternationalACME holding