Why Biwott and Co decided to sell KenolKobil [15-05-2012]
On Tuesday last week, word went out that KenolKobil, a Kenyan firm that operates fuel stations in 10 African countries and is associated with former Energy Minister Nicholas Biwott, was selling 63 per cent of its shares — owned by top four shareholders — to a Swiss-based firm, Puma Energy
For a company currently trading at Ksh12.50 ($15 cents), 25 per cent higher than last year and a mere five times its historical earnings per share, the news hardly excited investors. Only 31 per cent of KenolKobil shares are available as free-floating shares on the Nairobi Stock Exchange.
However, for a market that rarely sees takeover deals, the transaction certainly attracted attention, with Standard Investment Bank, the only brokerage firm covering the petroleum retail business in Kenya, saying that KenolKobil is a good buy and maintaining sell recommendation on Total Kenya. It immediately put a valuation of Ksh25 billion ($301 million) on the company.
This price placed a fair value of the firm at nearly Ksh40 billion ($480 million). KenolKobil shares are valued at Ksh18 billion ($216 million) on the NSE.
The big question however is why Mr Biwott and his business associates would be so willing to sell what is considered by outsiders as not only his flagship business, but easily the largest business in East Africa, with sales hitting Ksh222 billion ($2.5 billion) in 2011. As eager as Biwott & Co are to sell, there are also questions over why Puma was interested in an African multinational oil distribution franchise when majors like Chevron and Agip have sold off their distribution networks on the continent?
On the other hand, Vitol partnered with Helios Investments Partners a year ago to buy 80 per cent of Shell Plc’s petrol station business in 14 African countries including Kenya and Uganda at a total cost of $1.8 billion.
Kenol’s shareholders are probably selling the business for three reasons:
First, last year, the company was involved in a major political scuffle with the Ministry of Energy, which blamed it for the persistent oil shortages the country was facing. Such an altercation with the government would not have happened in the Kanu days when Mr Biwott and former president Moi were in power.
Second, the oil retail business has been performing so poorly that few research departments of investment banks bother to cover it. For instance, in 2011, KenolKobil had its best year, doubling sales to $2.5 billion — the highest of any company in the region — and growing profits from $18 million to $30 million.
However, as impressive as the sales were, the profits, which amount to one cent on every dollar of revenue, tell a sad story of where the industry is headed. At this level of profitability, selling petroleum products must be the hardest way to make money in the region, and it explains why KenolKobil makes more money from trading oil in the wholesale market and trading in currency than it does from retail sales.
Third, KenolKobil has been growing at a rate at which it cannot, at its current level of profitability, fund the business with internally generated cashflows. The company was been operating on negative free cashflows as at the end of 2011 and had borrowed $170 million from the banks, which was biting a huge chunk out of its profits.
Total Kenya has been having an even worse time; last week, it had to call on its parent company, Total Eni, for a capital injection to replace an expensive debt amounting to $50 million.
A look at the history of the firm and its financials over the past 10 years gives a glimpse of why today they are looking to sell out to a strategic investor
Kenol was formed in 1959 by Sir Reggie Alexander, a member of the Legislative Council. In 1980, the business ran into trouble and Kenol went into receivership for two years until 1982, when Zeevi Gad, an Israeli businessman associated with Nicholas Biwott, then a rising star in government. Mr Gad and his partners were eager to expand their oil business and their quick wins included a lucrative supply contract with former president Moi’s Kanu government.
In 1984, when Mobil was making an exit from the Kenyan market, Kenol bought its assets and renamed it as Kobil, which was domiciled and registered in Delaware, US. Kenol and Kobil enjoyed supply deals with the National Oil Corporation of Kenya, which was responsible for supplying 30 per cent of petroleum to Kenya. Soon, the struggling business zoomed past the multinational oil majors in market share.
In January 1986, Kenol and Kobil Petroleum Ltd (Kobil) entered into a joint operations and management agreement. Mr Gad and his partners then consolidated the two companies under one management, although the entities remained separate. Kenol had its own brand and Kobil had its own. The two companies formally merged in 2008, through a share swap deal with the entity now known as KenolKobil.
Mr Gad and Mr Biwott have had a lot of common interests, including the Yaya Centre shopping mall in Nairobi, which was constructed by H&Z Co, a company associated with Mr Gad.
Yaya was the name of Mr Gad’s mother. Gad is said to be back in his native Israel, though it is not clear whether he still has a shareholding in KenolKobil.
Kenol continued to thrive through the 1980s, and in 1990, Mr Gad brought in Jacob Segman in a management position. The soft-spoken young executive would rise to become the most influential chief executive in the country at the end of the last century.
This was a time when the oil distribution business was facing the reality of economic liberalisation and an end of price controls in the mid-1990s. When Mr Segman took over as the boss in 2000, Kenol was making a net profit of about Ksh150 million ($1.8 million) on revenues of Ksh5 billion ($60 million).
Around this time too, the industry saw the mushrooming of independent petrol stations, makeshift structures offering cheap, adulterated fuel. The majors, hobbled by high operating costs, started feeling the pinch and this saw the exit first of Esso, then Agip from the Kenyan market.
In response to this, Mr Segman launched a noisy public relations campaign against the independents, but he did not entirely win. Soon, he took on Kenya Petroleum Refineries Ltd, calling for it to be shut down because the law forced all the operators to process their crude through its inefficient Mombasa plant. Eventually, KenolKobil’s dominance in the Kenyan market ended up in a nasty dust-off with Kenya Pipeline.
As the oil majors were pulling out of Kenya, Mr Segman had the wisdom to expand to Uganda, Tanzania, Rwanda, Burundi, Zambia and Ethiopia.
This allowed the company to expand its footprint and buy fuel in huge volumes at substantial discounts. However, KenolKobil’s expansion not only exposed the company to great political risks, it also forced it to operate in very harsh environments. Mr Segman has driven the oil marketers’ expansion through acquisition in several markets in the region and Southern Africa. The company has invested Ksh6 billion ($72 million) in these deals so far, according to the annual report, in the process growing its revenue from $47 million in 2000 to $2.5 billion in 2011, and $1.4 million in profits to $30 million today.
This growth implies that Kenol’s sales have been growing at an average rate of 35 per cent.
As a manager, Mr Segman has been handsomely rewarded.
The company entered an options agreement with the CEO under which he is entitled to receive options for units amounting to four per cent of the company’s shares in respect of the financial years 2010 to 2014 that was issued on May 1, 2011.
The CEO’s options are priced at the ruling subscription price at the end of 2009. If these options were to be priced at the current market price, they would be worth nearly $10 million, which makes Segman one of East Africa’s highest paid business executives.
If Puma Energy buys KenolKobil’s shares, the management agreement will see Mr Segman retained, though it is not known in which capacity. He may well be charged with a bigger role of overseeing Puma Energy’s operations in Africa.
Puma Energy’s planned purchase of KenolKobil kicks off a race between two of the largest oil trading companies globally, Trafigura and Vitol, for control of the sub-Saharan oil market. The large oil trading oil companies are eyeing the opportunity to enter the African market through acquisitions of players like KenolKobil with downstream assets such as the petrol stations that serve retail clients — giving the oil trading companies the ability to offload the commodity through these downstream assets.
Puma Energy, which was founded in Central America, last week said it had signed an exclusive agreement with the key shareholders of KenolKobil to acquire their shares.
Trafigura, a Swiss-based company, has been in the headline for all the wrong reasons, with UK’s The Guardian newspaper reporting in February that Trafigura had been buying oil “looted” from South Sudan by neighbouring Sudan.
Sonangol, the parastatal that oversees petroleum and natural gas production in Angola, is another shareholder in Puma Energy with a 20 per cent stake.
The shareholders are planning to list Puma Energy in an initial public offering by the end of this year, though the company has not decided at which exchange.
With the acquisition of KenolKobil, Puma Energy’s listing is expected to draw interest because it will have a strong presence in East and Central Africa.
Other African oil operators have also been looking to sell out.
Addax & Oryx’s supply, storage and distribution businesses were bought out by Emerging Capital Partners, a private equity firm, with the deal valued at between $250 million and $500 million. Trafigura and Vitol were said to be interested in the company but lost out.
“In its IPO, Puma will be selling the attraction of having acquired KenolKobil, which is in an emerging market,” said Eric Kimanthi, an analyst with Standard Investment Bank.
KenolKobil has operations in 10 African countries and has been acquiring companies in East and Central Africa as well as investing in infrastructure such as LPG storage.
The oil marketer has increased the number of its fuel stations tenfold in two decades to 400 stations in the Central, East and Southern Africa, with its revenues passing $2.5 billion dollars, the highest reached by any listed company in the region.
Puma Energy’s acquisition of KenolKobil will make some of its key shareholders wealthy. The acquisition will add onto the 1,100 stations Puma has across Africa, Asia, Latin America and Caribbean.
Puma Energy has also purchased five new distribution and storage subsidiaries from BP in Southern Africa, bringing in more than 190 service stations and storage facilities in its portfolios.
KenolKobil’s key shareholders are Wells Petroleum Holdings (24 per cent), Petrolholdings (17.4 per cent), Highfield (12.46) and Chery Holding (7.89 per cent). The four shareholders have a combined 63.42 per cent stake in the oil marketer.
And although the identity of the four shareholders is not publicly known, the top shareholders are linked to Mr Biwott.
KenolKobil has several oil storage facilities in Tanzania, Burundi, DRC, Zambia and Uganda. It has LPG storage and filling plants in Kampala and Rwanda.
“Acquiring diverse and adequate storage facilities is a capital intensive but strategic exercise, giving KenolKobil a competitive advantage over its competitors,” said analysts from Kestrel Capital in a research report on the company’s full year results.
Trading of oil, export to other markets and selling to the aviation industry contributed the lion’s share of the revenues.
KenolKobil’s management began talking of bringing in a strategic investor last year. “We needed foreign investors who could bring in capital and have an understanding of the business,” said Mr Segman
“The share price has been depressed because of the shareholding structure. We were looking at ways of increasing the value of our share price,” he added.
KenolKobil’s shares were suspended from trading on Tuesday last week pending the conclusion of the deal; they were trading at Ksh12.50 ($15 cents).
Article by: Emmanuel Were
Source: The East African (NMG)