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The plight of minority shareholders in post-restructured Kenya Airways

By Macharia Kamau | November 28th 2017
By Macharia Kamau | November 28th 2017
From left: Investment Secretary Esther Koimet, Treasury CS Henry Rotich and his Transport counterpart James Macharia and former Kenya Airways CEO Mbuvi Ngunze during the Kenya airways signing of financial and capital optimisation plan at the National Treasury. [Willis Awandu, Standard]

One Mike Maina Kamau owned four per cent of national flag carrier Kenya Airways (KQ) before the just concluded financial restructuring.

The stake put him as one of the largest individual shareholders.

He was the fourth largest shareholder after the Government, Royal Dutch Airlines and an undisclosed shareholder under a Standard Chartered nominee account.

His stake has however been diluted by 73 per cent to 1.1 per cent in the post-KQ capital optimisation plan shareholder structure.

Owning one per cent of the airline is however still a substantial stake, considering its size.

With 64.4 million shares, the value of his stake would translate to Sh341 million going by the Sh5.30 share price at the Nairobi Securities Exchange prior to the suspension of shares from trading at the bourse.

This was to allow the airline conclude the restructuring.

The same fate has befallen more than 78,000 retail investors in KQ, following the restructuring that is expected to put the airline back on a growth path.

The process has resulted in National Treasury growing its stake to 48.9 per cent from the previous 28.9 per cent.

It has also brought in 10 local banks, through the special purpose vehicle KQ Lenders Company, as the second largest shareholders with a 38.1 per cent stake. Treasury and the banks converted loans owed to the airline into equity.

Retail investors, excluding the large institutional and individual shareholders such as Mike Maina, owned 24 per cent of the airline in the financial year to March 2017, according to KQ’s annual report for the year.

Their stake has been diluted to 2.8 per cent.  In the new structure, the likes of Maina are now categorised among the ‘other shareholders’.

To soften the blow on the minority shareholders, the airline is offering an opportunity to claw back their stake through an exclusive rights issue in which they will be invited to shore up their investments for up to Sh1.5 billion following the completion of the restructuring.

“There will be an open offer to the minority shareholders to buy back. But this would come after the closing restructuring. The timing will be communicated by the board,” said Mbuvi Ngunze former KQ chief executive who has also been an advisor on the financial restructuring.

Additional cash

If they take up the offer, ordinary shareholders will then get a paltry five per cent albeit of a good company.

The Company said it will use the additional cash raised through the Open Offer to further reduce debt and to fund its operations.

The shareholders approved the restructuring on August 7, after the airline told them there was no other viable alternative for the airline.

KQ is bullish on a turnaround to profitability and expects its share price to soar above the current levels of Sh5.

It is optimistic that the small shareholders will get a discount when topping up their stake to sweeten the deal. “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 (and at a discount to the value at which the Government and KQ Lenders Company Ltd were issued Ordinary Shares as part of the Restructuring),” said KQ in the recent past.

KQ is even promising that the open offer will be exclusive to the small shareholders and that neither the Government nor KLM or even the 11 lenders will use the opportunity to muscle up their stake.

“In order to reduce further share dilution for shareholders, KLM, KQ Lenders Company Ltd, the Government, at the time of making the Open Offer will give undertakings waiving their rights of pre-emption and agreeing not to participate in the Open Offer,” said the airline.

This is not guaranteed as they are mere commitments and by the time the offer comes up for sale, the situation of the airline may have changed.

If the Sh1.5 billion offer is shunned, Kenya Airways has left itself the option to offer the shares for subscription by investors who apply through the market.

The State said it would not take control of the airline following the restructuring but will divest it by getting a strategic investor on board for ten years.

Treasury refrained from converting all its debt into equity in a bid to prevent its ownership in the airline from going beyond 50 per cent and becoming a State corporation hence left Sh8.5 billion ($85 million) as debt.

“Over time, we will want to have more private participation in the airline. We have worked successfully since 1995 since it was privatised. Government shareholding has been under 30 per cent which has worked well,” said National Treasury Cabinet Secretary Henry Rotich.

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