Barely two years after Kenyan equity firm TransCentury exited the Kenya-Uganda railway concessionaire Rift Valley Railways, the firm is again on the verge of a major change in shareholding, with reports indicating that Egyptian majority shareholder Qalaa Holdings is looking for buyers.

Qalaa is talking to several suitors with a view of selling either part or its entire 85 per cent stake in the concession that still has 17 years to go.

Although officials at RVR refused to comment on the reports, sources familiar with the developments say there have been exploratory talks with firms from the US, Russia and South Africa.

“Qalaa is a venture capital fund. When they get a good offer, they will exit. Now is the best time because the prospect of transporting Kenya’s crude to the Coast would be attractive to any investor,” said a source who claimed Qalaa was considering proposals from five potential investors.

Given that TransCentury sold its 34 per cent in RVR to Qalaa for $43.7 million in 2014 and Centum sold its 10 per cent stake in 2010 for $4.5 million, RVR could now be worth $250 million.   

Were Qalaa to exit with the basic investment in infrastructure and rolling stock already made, the focus would be on operational efficiency, potentially resulting in a more vibrant operation.

In an ideal world, the new investor should be an experienced rail operator. Some stakeholders have accused Qalaa of concentrating too much on energy investments in the Middle East and North Africa.

Competition from the operator chosen to run the standard gauge railway, speculated to be eventually from China, is also another factor for any buyer to consider.

Another source in Kampala says Qalaa has been trying to prepare the Kenyan and Ugandan governments for a possible sale to a third party.

Kenya, however, said Qalaa had not indicated any intention to exit the Kenya-Uganda operation. “They are the largest shareholder in RVR and if they want to exit, they have to give us notice. So far, we have not received anything,” said Atanas Maina, Kenya Railways Corporation managing director. 

Signs that the Egyptian investor was reconsidering its investment in RVR first emerged in its report of the 2016 first quarter results where it classified the investment in RVR as “liabilities held for sale.”

“Total debt as at March 31 stood at EGP5.64 billion ($630 million) excluding Egyptian Refining Company and following the classification of Rift Valley Railways as liabilities held for sale. Qalaa’s total consolidated debt at the end of March 2016 stood at EGP19.11 billion ($2.1 billion), up from the EGP17.11 billion ($1.9 billion) booked at the end of the previous quarter,” the company says in the report.

Although some sources within the company claimed Qalaa was taking advantage to cash in on its stake following increased investor interest in RVR after the Kenyan government announced its intentions to transport its oil by road and rail, the report suggests that the firm was losing patience with RVR’s slow turnaround and was recasting its investment strategy.

According to the financials, losses from Qalaa’s discontinued operations stood at EGP93.9 million ($10.5 million) during quarter one with Rift Valley Railways contributing EGP68 million ($7.6 million) of that figure.

“Qalaa’s management had concluded that additional capital is required to turnaround the company’s weak operational performance and continued unprofitability. However, given the strategic direction of allocating full capacity and resources to core energy units, management decided to categorise RVR as a discontinued operation with its consolidated debt of EGP1.7 billion ($191 million) now classified as liabilities held for sale,” the report says.

As part of its transformation strategy, Qalaa has decided to relinquish insolvent investments in its efforts to stabilise profitability while redirecting resources to “value adding projects with promising futures.”

Although the company has made progress reducing turn around times for cargo from Mombasa to Kampala from 21 days to just seven, on the back of investments worth $287 million, its share of cargo traffic from Mombasa has remained stuck in the single digits.

The investment programme has been financed through a combination of debt, equity and cashflow. Lenders contributed $164 million, the shareholders pumped in $82 million while $41 million came from cashflows.

RVR chief financial officer Bong Yoon disputed reports that the concession had fallen behind on payments to the governments of Kenya and Uganda.

“From my position, we are doing fine. We have met all the KPIs and we are meeting our obligations to the governments,” he said.

But The EastAfrican has separately learnt that RVR had stopped paying the principal and has since the beginning of the year only been paying interest on the loan extended to it by a consortium of lenders led by the African Development Bank, which contributed nearly a quarter of the $164 million finance package put together by a consortium of lenders that include Kenya’s Equity Bank, which put up of $20 million.

Sources in Uganda dispute Mr Bong’s assertion, pointing out that while the concession is up to date to the last quarter with concession fees to Uganda, it has not paid Kenya for two consecutive quarters.

RVR is also embroiled in a dispute with Kampala where the taxman wants it to pay VAT on its concession fees. RVR is said to have so far refused to pay $2.7 million in VAT arrears.

There is also an outstanding dispute with the regulator Uganda Railways Corporation over the revenue sharing.

When they took over the concession in 2010, Kenya and Uganda were sharing revenue at a ratio of 3:2. While RVR continued with this arrangement for a while, it unilaterally changed the ratio to 4:1, effectively halving Uganda’s earnings from the business.

Uganda is claiming $4 million in accumulated arrears and has issued a notice of default.