Kenya’s Uchumi Supermarkets Ltd is on the verge of insolvency as efforts to negotiate a cash injection hit a snag in the first quarter of 2016. Its debt to suppliers has skyrocketed to Ksh3.6 billion ($36 million), double the Ksh1.8 billion ($18 million) quoted last year, according to the management.
“Settling a significant part of this debt requires funds outside our normal operating activities. We are working on this through disposal of land and sourcing for an investor. We, however, continue settling current supplies from our operating cash,” Uchumi chief executive Julius Kipngetich told The EastAfrican last week.
Getting an investor to inject the much-needed Ksh5 billion ($5 million) is taking longer than expected while the sale of assets expected to contribute up to Ksh3.6 billion ($36 million) to settle suppliers’ debts has been delayed by court cases.
Only KCB has approved loans to the tune of Ksh1 billion ($10 million), which would only offset 56 per cent of the total debts owed to suppliers by its Kenyan branches. The retailer said more lenders had agreed to provide bridging finance soon, subject to completion of legal processes.
Analysts at Cytonn Investments Management Ltd say Uchumi’s quest to get quick cash could be delayed by a failure to get the Ksh5 billion capital in the short-term and the inability to sell its non-core assets.
“Uchumi will find it difficult to attract investors who will inject the amount needed to restructure the company, considering the only positive value on offer is the brand. All the non-core assets seem to be tied up in contestations, making it impossible for the company to rely on the sale of the assets to boost cash flows,” said Cytonn in an email.
Kenya Airports Authority, which claims ownership of the land of Lang’ata Hyper, in December 2015 contested Uchumi’s intention to sell 2.5 acres, cautioning prospective buyers against buying or leasing the land. Another 20-acre piece of land in Kasarani that Uchumi intended to sell has a 10-year-old ownership dispute with Sidhi Investments.
Uchumi had hoped to raise up to Ksh3.6 billion ($36 million) from the sale of the two pieces of land. In earlier plans, the retailer expected to raise a Ksh800 million ($8 million) loan from the banks, which would be used to settle part of the Ksh1.8 billion owed to suppliers in 2015.
The remaining Ksh1 billion ($10 million) was supposed to be part of the asset sale proceeds with Ksh2 billion ($20 million) of the proceeds to be used to grow Uchumi’s business in the Kenyan market.
“The prolonged court battles will set Uchumi’s plan for capital raising back, considering that even strategic investors interested in Uchumi will only want to invest in the company after the cases have been solved,” said Cytonn’s analysts.
According to ICEA Asset Management chief executive officer Einstein Kihanda, the retailer could have been too ambitious in its turnaround strategy ahead of securing funds for suppliers. “Without suppliers, the business is dead. Many products are absent from the shelves,” said Mr Kihanda.
In defence of the lack of goods on the shelves, Dr Kipngetich admitted there was a supply problem that had resulted in available stocks being spread out thinly across all chains, but plans to find a solution were ongoing.
“The challenges we have been facing with supplier payments due to cash issues have seen some of them stop supplying to us. As we work on sorting out cash flow issues, we have decided to channel the available stock into fewer stores that have greater potential. We are currently operating with 20 stores,” said Dr Kipngetich.
Fund managers said the strained supply chain could have led to the recent closure of five branches in the Kenyan market — in the Taj Mall, Embu, Eldoret Sugarland, Nakuru and Kisii.
“The supply side could have been strained on two grounds — failure to settle previous debts owed to suppliers and a lack of immediate replacement for the supply chain linked to former managers. It is not easy to replace the chain, especially on credit,” said Mercyline Gatebi, equities analyst at Genghis Capital.
The second and third phases of Dr Kipngetich’s strategy were optimisation and growth, including restocking, and finally expansion. The strategy includes opening of new stores in key mass market areas, including mini-stores. However, without funds and committed suppliers, it remains an uphill task for Uchumi.
“The current credit lines it has entered into with local banks will help Uchumi stay afloat in the short-term. However, with the current pressure from suppliers for payments, we expect Uchumi to struggle to meet its obligations in the short to medium-term,” said Cytton’s analysts.
Uchumi’s main shareholders are Jamii Bora Bank, which together with Goodwill Ltd, an affiliate firm, holds a 15.19 per cent stake, while the government owns 14.67 per cent. According to the Cytonn analysts, the principal shareholders will not be able to inject capital in the near-term, since banking regulations require that they raise funds for their core business first.
In Kenya, 283 employees who lost their jobs after the closure of five branches have taken Uchumi to court demanding more compensation money.
Uchumi had opted to pay the sacked staff two months’ salary in lieu of statutory and redundancy notice, 15 days’ severance pay for each year worked, accrued leave, off-days, overtime, and pension contributions. The rationalisation process has affected 1,483 employees in Kenya, Uganda and Tanzania.
In Uganda, former Uchumi employees are in court seeking terminal benefits of up to Ush6.25 million ($61,274). In Tanzania, Uchumi is said to owe suppliers and landlords Tsh9.3 million ($91,176).
“After closing our operations in Uganda and Tanzania, the appointed liquidator is currently in the process of selling off the assets, whose proceeds will be used to settle existing liabilities after verification. This process is expected to end by the time we close our current financial year in June,” said Dr Kipngetich.