The ownership of KPLC is bound to change substantially as it emerges that the government has approved a plan to float a massive rights issue that will permit existing shareholders of the company to increase their stakes in the profitable company.

The first step will entail conversion of government-owned preference shares worth $213 million into ordinary shares at a rate of 1:1 — effectively increasing the government’s stake to a massive 71 per cent.

In the second stage, the shares will then be split to make the stocks affordable to KPLC’s 20,000 small shareholders.

Finally, the government will then float a rights issue in which it will not participate, allowing the state’s stake to be diluted to its current level of 40 per cent. The proposal to restructure KPLC’s balance sheet made by the Ministry of Energy has been approved by the Treasury.

Faced by a major financial crisis in 2004, the government pumped in $68 million into the company to turn it around and mitigate a looming energy crisis.

People familiar with the details say the Treasury is happy that the preference shares will be converted at market price and will therefore not impact the taxpayer negatively.

The plan is expected to benefit small investors who have been locked out of KPLC’s equity as its price on Nairobi Stock Exchange has surged 63 per cent to $2.4, driven by the firm’s brightening profit outlook.

Though KPLC has not announced the impending rights issue, it is expected that it could be put to a shareholders’ vote during KPLC’s annual meeting after the close of the current financial year ending June 30.

The balance sheet restructuring plan proposed by the Ministry of Energy will see the government convert its preference shares worth $213 million, which pay an interest of 7.85 per cent, into ordinary shares.

This deal, which has been promoted as a win-win solution to the firm’s capital structure challenges, will also help the company get more stable long-term capital to finance its growth.

These preference shares ideally should cost KPLC Ksh1.3 billion ($17.3 million) in annual interest payments — payments that do not enjoy that tax shield that pure debt typically attracts and that must be paid before ordinary shareholders receive a cent, should a dividend be declared.

This class of shares was created to ease the pressure of interest payments on emergency funding loans that KPLC took out at the height of its financial crisis in 2004, when the firm faced insolvency and could not provide a reliable supply of cheap electricity to the economy.

Restructuring

Though these preference shares do not trade on the NSE, they have a nominal value of Ksh20 ($0.26) each at par with ordinary shares, meaning that they can easily be converted one for one with those currently trading in the market at Ksh180.

With the conversion, the government will be able to turn $213 million’s worth of debt into equity — representing 10 per cent or 87.12 million of the 795 million of that class of preference shares that have been issued.

This accordingly values the entire stock of this class of security held by the government at $2 billion.
At this level of market valuation, the proposed balance sheet restructuring will turn a major emergency loan made to a struggling state-owned company into a lucrative investment made on behalf of taxpayers.

Indeed, the company’s share price has risen 20 per cent since the approval was approved in November.
KPLC’s ordinary shares are currently valued at $1 billion on the NSE.

However, the conversion will come with some pain for existing shareholders who will suffer significant dilution of their stakes in the company as the government’s shareholding increases temporarily from the current level of 40 per cent to 71 per cent, before the expected rights issue and share split.

It is understood that the government will revert its holding in KPLC to 40 per cent.
With the government intention of renouncing its rights to buying more shares, opportunities to buy the 30 per cent stake it is giving up will be immediately available to major institutional investors.