Fresh details have emerged showing how a group of international financial institutions and private equity funds rallied around Egypt’s Citadel Capital to repel a bid by Kenya’s TransCentury group to wrest control of Rift Valley Railways — the entity currently running the Kenya Uganda Railway under a 15-year concession.
In what amounted to a vote of confidence in Citadel, the international development finance institutions led by FMO of the Netherlands moved quickly to mobilise funds to pay off TransCentury, a high-profile and politically influential Kenyan investment group that had sought to exercise its put option in the RVR partnership to buy out Citadel.
Other development financiers who funded the reverse buyout of TransCentury from RVR were the Africa, Latin America and Caribbean Fund (ALAC), DEG of Germany, the French private equity fund, FISEA and the International Finance Corporation of the World Bank.
On Wednesday, TransCentury said it was projecting at least a 25 per cent fall in net profits this year due to a paper loss from the sale of the 34 per cent stake in RVR.
The company is projecting profits to fall below the Ksh626.4 million ($7.3 million) it made last year. It said that while it recouped all the funds it had put into RVR, it did not get replacement value for the current value of its shares from the sale — meaning it will book a loss in the current financial year.
TransCentury first invested in RVR in December 2006 when it acquired a 20 per cent stake in the company.
In May 2010, as it was increasing its stake in the company to 34 per cent, it signed a shareholders agreement with Citadel Capital in London that provided for what is referred to in corporate law as a put option.
Basically, a put option is a tool for dealing with irreconcilable differences between shareholders. It allows the minority shareholder to give an ultimatum to its partners: Buy me out or I buy you out.
Citadel, through Ambience Ventures Ltd, owned 51 per cent of RVR, with TransCentury’s 34 per cent held by the entity, Safari Rail Ltd. Uganda’s Bomu investments owns the remaining 15 per cent stake.
In this specific case, the notice period for exercising a put option was 67 days. TransCentury gave notice to Citadel on January 24, which meant Citadel had until March 31 to pay up or be bought out.
Had Citadel failed to raise the money to pay for TransCentury’s 34 per cent stake in RVR within the specified period, it would have been edged out of RVR. It was therefore make or break for the Egyptians.
Clearly, TransCentury had calculated that the Egyptians would not be able to raise the money to pay for their stake within 67 days.
Indeed, the timing of TransCentury’s attack on the Egyptian investors was not without context. In the first place, the fortunes of Citadel Capital on the capital markets in Egypt where it is listed, had lately taken a hit as a result of the protracted political crisis and economic turmoil in that country.
Moreover, the move by TransCentury to exercise the put option came at a time when Citadel Capital was in the middle of raising funds in the Egyptian capital markets through a rights issue. It was an opportune moment to strike, take control of RVR and perhaps bring in partners with less political baggage than the Egyptians.
For most of January and in the early days of February, all indications were that the Egyptian investor was about to surrender RVR to the Kenyan investor.
What surprised observers of the drama was that as the deadline for the put option approached, other international investors seeking to take up the Egyptian’s share in RVR started trooping to Nairobi to express interest.
The giant South African rail operator, Grindrod, is said to have made inquiries. Also said to have expressed an interest was the South African billionaire Jonathan Oppenheimer, whose family until recently owned 40 per cent of the South African giant mining group, De Beers.
The real drama started unfolding in early March, with Citadel writing to the Principal Secretary in the Ministry of Transport and Infrastructure, Nduva Muli and Uganda’s Permanent Secretary to the Treasury Keith Muhakanizi, officially informing the two governments about imminent changes in the ownership of RVR.
In the letter, Citadel also sought to assure the two governments that the likely changes in the ownership would not materially affect the concession agreements and deeds it had signed with both governments. Neither did Citadel elaborate on the exact terms and implications of the put option.
“The exercise of the option will result in either Ambience Ventures holding 85 per cent of the company, or Safari Rail Company becoming the holder of 51 per cent of the company,” said Citadel in a letter signed by its managing director Karim Sadek.
Apparently, the fine print of the shareholder’s agreement stipulated that if the Egyptians failed to pay, TransCentury would acquire a 17 per cent stake of RVR for one dollar, thus raising its stake to the dominant position of a 51 per cent shareholder.
The turning point came at a meeting between the shareholders and financiers of RVR called by Kenya’s Cabinet Secretary for Transport and Infrastructure, Michael Kamau, in his Transcom offices in Nairobi.
It was at this meeting that the international lenders first indicated to the government in Kenya that they would stand by Citadel. The tide had turned. The shareholder’s agreement stipulated that a put option, once exercised, was not reversible. TransCentury thus found itself snookered.
On March 31, Citadel wrote to the Kenya and Uganda governments to inform them that the transaction had been completed in London and the legal documents executed in the presence of representatives of the two shareholders.
Citadel also disclosed that the transaction had been funded by the DFI and private equity funds in their capacities as shareholders of Ambience Ventures Ltd.
Apparently, the DFIs have pledged to support the RVR project not only by providing the money to buy out TransCentury but also by providing equity of $20 million to fund a capital expenditure and turnaround programme currently being implemented by RVR.