Uncertainty surrounding the future of the Kenya-Uganda Railway concession has claimed its first casualty, with a private equity firm pulling out of a deal to acquire the operator Rift Valley Railways from Qalaa Holdings of Egypt.
The decision by Emerging Capital Partners to disown talks that had been confirmed as ongoing by, among others, the Kenyan regulator of the line got a quick response from RVR, which said it would seek answers from its shareholders (Qalaa) on what was going on.
“ECP is not currently in discussions with Rift Valley Railways or its principal stakeholders about an investment in RVR,” said the firm in a statement.
The ECP statement came almost a fortnight after it was reported to have commissioned an audit firm to carry out due diligence on RVR’s financial position. It also came a week after it emerged that Kenya had terminated the RVR contract over non-payment of fees.
Due diligence, the perusing of books to confirm accuracy with third party records like asset registries and bank accounts, usually follows an agreement in principle of interest in acquiring a company. It is done on a strictly confidential basis.
When contacted by The East-African, RVR chief executive officer Isaiah Okoth said he was awaiting communication from Qalaa Holdings on the new developments.
“ECP has been negotiating with shareholders and I am waiting for official communication to know the status of the negotiations,” Mr Okoth said. Later, RVR issued a statement signed by Mr Okoth which just fell short of questioning ECP’s integrity.
“RVR has been in discussion with several potential investors, including ECP, through its shareholders. As far as RVR is concerned ECP has been involved in due diligence of RVR business,” reads the statement signed by Mr Okoth.
Barely a week after Kenya Railways Corporation terminated the Rift Valley Railway concession, ECP has walked out on plans to acquire the majority shareholding in RVR.
ECP, which had reached an agreement with Cairo-based Qalaa Holdings to acquire its 73.76 per cent stake in RVR, has opted out of the deal following the termination of the 25-year concession.
It added that it will continue to explore opportunities to invest capital to support the growth of East Africa’s infrastructure sector.
RVR also said it was pursuing other options in consultation with the Kenyan and Ugandan regulators “with a view to achieving the best possible outcome for all stakeholders in this regard.”
The decision by ECP to opt out of the deal at the eleventh hour makes RVR’s position even more problematic, considering it was mainly banking on the coming on board of the new investors not only to salvage the concession but also to inject capital into the business to ease its survival.
According to observers, ECP must have decided to opt out of the RVR acquisition after the company lost the main asset, which is the concession and which still had another 13 years before it expires.
“The concession agreement is the main asset for RVR. It is the main value for investors,” said Philip Muema, Nexus Business advisory managing partner.
Last week, KRC terminated the 25-year concession citing defaults on various parameters of the concession agreement by RVR.
RVR managed to get a 30-day temporary relief after the High Court put an injunction on the execution of the termination notice, which gave the company a 120-day window to salvage the concession.
In an earlier interview with The EastAfrican, Mr Okoth had exuded confidence that RVR would seal the deal with ECP within the timeframe.
But with ECP pulling the plug, RVR is technically on its deathbed unless Qalaa digs into its coffers to settle the company’s outstanding financial obligations.
In terminating the concession, KRC said that RVR has defaulted on three key terms of the concession agreement — namely standard of maintenance of conceded assets, freight volume targets and payment of concession fees.
On assets, RVR has failed to maintain the track, resulting in speed restrictions on 187 km of the main line, which is 17.3 per cent of the line.
RVR has also failed to rehabilitate and maintain the locomotives, rolling stock, buildings and structures.
On freight volume, the company has failed to achieve targets as at the end of year nine, recording 1.1862 BNKM against a target of 2.1145.
On fees, RVR has failed to settle concession fees totalling $4.1million as of December 2016, rent amounting to $1.7 million and another $20 million and $10,720 for life expired assets and life expired wagons and assets destroyed in accidents respectively.
Since taking over the concession to operate the 1,300 km metre gauge railway from Mombasa to Kampala in 2006, RVR has remained in the red and has failed to improve railway transport with its annual cargo haulage stagnating at 5 per cent of the total cargo arriving at the port of Mombasa.
In a span of 12 years, RVR has changed hands four times.