The Kenyan government is disposing of shares in five sugar mills under a debt for equity swap mooted by the Privatisation Commission.

Solomon Kitungu, the chief executive officer of the Commission, said the government would write off at least Ksh40 billion ($414 million) of its handouts that the millers — Nzoia, Chemelil, South Nyanza, Muhoroni and Miwani —  have defaulted on excluding taxes, which are owed to various agencies.

The creditors now have a window to convert the Ksh13 billion ($134 million) they are owed, while farmers and suppliers will be invited to own the companies in lieu of the Ksh6 billion ($62 million) outstanding for cane deliveries and services.

The portion of each of the five companies to be owned by the creditors will be determined after due diligence and restructuring of the companies’ balance sheets.

“The total indebtedness was Ksh59 billion ($611 million) as at June 30, 2009. The current debts will be known once the Commission updates its due diligence reports,” said Mr Kitungu.

The companies are being privatised to enhance efficiency and allow for open trading in sugar across East Africa once the Comesa safeguards to protect the Kenya market end in February 2016.

READ: Comesa’s new plan to lock out sugar imports cartels

Privatisation strategy

According to the privatisation strategy, a write-off to clear excess debt and conversion of debt to equity of various amounts is an initial step towards creating healthy balance sheets. A consortium of advisors, led by Ernst & Young, has been guiding the process.

Analysts said the write-off would help to attract investors as happened when Kenya Airways was privatised in 1996. However, they called for more disclosures on the performance of the companies so as to create confidence among investors.

“The historically poor performance of the five government-owned companies could see investors hold back unless there is a clear overhaul strategy, especially in the total debt clearance. They are probably not going to attract a good price,” said Standard Investment Bank analyst Eric Musau. An underlying risk, he said, was new debts emerging after the privatisation.

Mr Kitungu said strategic partners with a track record of operating profitable sugar companies would be picked  through a competitive bidding process.

“Local, regional and international firms who meet the required qualifications will be invited to bid,” said the Commission.

The factories have been marred by poor governance and corruption while the equipment is worn out, according to the Agriculture, Fisheries and Food Authority.

“Was an audit carried out and if so, what were the findings and resolutions? Any investor will dig into the companies’ past, no investor would be willing to buy and pay liabilities later. Ceding majority shareholding  may, however, attract attention,” said Einstein Kihanda, chief investment officer at ICEA Asset Management, adding that the sugar industry is highly politicised in Kenya and transparency will boost investor confidence.

The government will give up 51 per cent to the investors according to the privatisation arrangement, from its current 98 per cent shareholding.

READ: Kenya to sell off five sugar firms to regional African investors

The Privatisation Commission said it plans to sell 24 per cent of the companies to employees and outgrowers — farmers who grow sugarcane on contract for the mills.

In 2001, when Mumias Sugar Company was privatised, farmers were robbed of their right to ownership as outsiders grabbed the farmers’ shares.

Mumias owes farmers more than Ksh400 ($4.1 million) as of March despite the government’s announcement that part of the bailout would be used to settle the debt owed to the over 120,000 farmers early this year.

This time an investment trust will be involved to ensure that the farmers get their share.

“The approval granted by the Cabinet and parliament requires that the shares set aside for the farmers and employees be sold through an investment trust. Shares in the trust will only be available to the farmers and employees.  The farmers and employees have three years to buy the shares set aside for them,” said Mr Kitungu.

Farmers are also liable to an extra 6 per cent in case the government decides to sell its 25 per cent stake through an initial public offering or any other means.

The high cost of production in the country remains a challenge to attracting investors who would prefer investing elsewhere in Africa.

Giving incentives to the new investors will go a long way toward attracting higher bidders. “The five companies are already challenged in terms of operations and cannot meet their target capacity due to high cost of production emanating from obsolete machines operating below their capacity,” said Ephantus Maina, a research analyst at Kestrel Capital (East Africa) Ltd.

The advisers have little time to come up with a convincing strategy to attract investors analysts said, which should include an audit, the financial statements and computing the value of the companies while assessing the state of land, buildings and machinery.

“The strategy should involve road shows to sensitise the farmers on their right to own shares while the target investors should receive presentations disclosing all vital details while proving their worth,” said Mr Kihanda.

The Commission said it was embarking on due diligence. The main aim of the proposed privatisation strategy is to benefit the farmers and put the companies back on track while diversifying into co-generation of power, ethanol production and other value-added products.

The Commission intends to hold consultations that will lead to the appointment of strategic investors within five weeks. Actual sales are not expected until after nine months.