Companies embrace mergers to sail through tough times

Thursday, September 12th, 2019 00:00 |

More firms will either merge or be acquired by stronger companies amid indications that some organisations may throw in the towel and let natural attrition take course.

Others have decided to look for greener pastures or move to rejuvenate across boarders.

But where did the rain start beating us? In the short term, analysts finger the slowing economy, but say the need to reduce market fragmentation, improve competition and fight corruption are low lying fruits in turning around Kenya’s fortunes.

They point out that the environment is a good case for mergers and acquisitions.

The service and production sectors are currently most susceptible to mergers and acquisitions, with unofficial data estimating a reported 141 cases of mergers in the year ended July 2018/19, compared to 148 officially registered cases by Competition Authority of Kenya (CAK) the previous year.

Dwindling economic fortunes during 2017/18 period following prolonged electioneering and adverse weather conditions affected operations, leading to 148 merger notifications.

“A majority of them instructively being registered in the second half of the financial year,” says a CAK report, which analysts say is a pointer of things to come given analysts’ observations.

Business integration

Troubled retail sector has seen Quick Mart Ltd and Tumaini Self Service Ltd announce commencement of a merger and business integration.

The deal saw Sokoni Retail Kenya, which is a special purpose vehicle controlled by private equity firm Adenia Partners, acquire a majority stake, at emerging retailer Quick Mart at an undisclosed amount.

A deal already approved by the CAK will see Sokoni merge the operations of Quick Mart and Tumaini Self Service to form a single retail operation.

This is set to give the investment a stronger footing in Kenya’s competitive formal retail space which has seen heavy weights such as Uchumi and Nakumatt supermarkets lose significant market share.

This merger deal comes hot on the heels of activities in the banking sector which shows KCB Group’s increased appetite for expansion, having recently completed the process of verifying Imperial Bank (in receivership) assets with plans to take over 7.5 per cent of the collapsed lender’s outstanding deposits.

The lender had already expressed interest in acquiring 100 per cent of struggling National Bank of Kenya (NBK), making it the second move on a fumbling lender in just four months.

In the banking sector, KCB’s deal brings to about 14 banking M&A in the last six years, six of which were announced between August last year and this year.

Caleb Mugendi, investment Associate at Cytonn Investments said expectations are that more mergers and strategic partnerships between banks will continue.

“This will create larger entities with sufficient capital base to pursue growth as well as increase their respective competitive edge and pricing power,” he said.

Speaking to Business Hub, economics lecturer Samwel Nyandemo said the mess in the economy points to a lot of vertical and horizontal mergers and acquisitions.

“Some loss making entities are hoping to survive on these mergers,” he said.

Some 15 listed firms at the Nairobi Securities Exchange have announced they cannot make ends meet amid claims the law capping interest rates resulted in an increase of non-performing loans (NPLs).

Sectors most hit by NPLs include trade at Sh20.5 billion (30.3 per cent), manufacturing at Sh19.9 billion (62.7 per cent) and real estate at Sh14.4 billion (48 per cent).

Since the interest capping law came into place, the market has witnessed several M&As which include acquisition of Giro Commercial Bank by I&M Ltd in February 2017, Fidelity Commercial Bank acquisition by SMB Bank (K) Ltd in May and DTB Kenya’s acquisition of Habib Bank in August 2017.

Mauritian lender SBM Group completed the acquisition of Chase Bank, which had been placed under receivership on “unsound banking” while Commercial Bank of Africa and NIC Group shook the top tier segment of the industry with a merger which created one of the largest financial services group in the region.

Telkom Kenya is currently in advanced merger talks with Airtel Kenya claiming that is the only way they can beat Safaricom, the dominant player in the market.

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