By Allan Olingo

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Regional retailer Nakumatt is running out of options for survival after it emerged that its owners have no immediate plan to inject new capital into the business as the Kenya government has ruled out bailing out a private enterprise.

Nakumatt managing director Atuh Shah said the company faces an intricate balancing act to meet all its obligations from internal cashflows, which is tough, going by the empty shelves after key suppliers have pulled out citing unpaid dues.

“We are surviving on internally generated cash in a balancing act to ensure that the scarce resources are reasonably applied to meet all overheads including staff remuneration,” Mr Shah said.

The company has not been forthcoming on the fate of a $75 million injection from a new investor that was expected in March in exchange for a 25 per cent stake.

READ: Cash-strapped Nakumatt seeks financial rescue

Ongoing negotiations

“This month alone, I have seen several groups and I believe they are sizing up the opportunity,” said a source, who also indicated that the talks had dragged on longer than expected as potential investors, especially private equity funds, kept reviewing their conditions.

There may have been a missed opportunity three years ago when the Nakumatt management bragged of investors trooping to its Industrial Area headquarters wanting in on the then $9.4 billion company.

At the time, however, the company was struggling to ward off questions over its ownership but these appear to have been resolved in November last year.

“There has been enormous interest in the retailer in the last eight months but the opacity of its books coupled with its owners resisting dilution of their interest have since seen the number of interested parties thin out. As it is all negotiations have ended,” a source privy to the goings-on said.

It is understood the investor who was to come in March would have released $40 million immediately and $35 million last month.

Serious ramifications

Nakumatt was hoping to use the funds to cut back its overall debt by retiring some of its existing funding tools including bank loans and related debts.

With that window apparently shut the owners could restructure its operations to keep it afloat, cede control to deep-pocketed investor, lobby for a government bailout or at worst liquidate the business.

“The government is not a Nakumatt shareholder so any public bailout is out of the question. However, the retailer’s collapse would have serious ramifications on the economy. This is why we are working hard to ensure the retailer stays open,” Kenya’s Trade and Industrialisation Principal Secretary Dr Chris Kiptoo said.

A private investor could also be discouraged by a rating agency’s downgrading of the company’s credit risk profile.

“At its last review in December 2016, Global Consumer Rating (GCR) highlighted the severe deterioration in Nakumatt’s credit risk profile. Their rating was downgraded,” GCR said.

The rating would have been worse were it not for the expectation of a substantial capital injection this year which is yet to materialise.

The management is still appealing for significant capitalisation of the business with a pledge to put the funds to good use.

READ: Nakumatt: Empty shelves, unhappy suppliers

As of February, Nakumatt’s net interest cover (firm’s ability to pay interest on its loans) dropped to 1.2 times compared with 1.8 times two years ago. Globally, a mark below 1.5 times is seen as red flag.

The retailer’s profit dipped to $3.05 million from $8.23 million four years ago on the back of rising financing costs.

“While capital expenditure has been high, the greater utilisation of debt has come from the working capital funding necessary to purchase stock for new stores. Gross debt has almost tripled from $42 million in 2011 to $150 million last year,” GCR said in its December review of the firm.

“The results reflect a weaker balance sheet and a strong cost base despite their cost line only being employee and rental premises. From this, there is an element that is sucking money out. This coupled with the chain’s ownership structure, is a potential turnoff for any strategic investor,” an analyst told The EastAfrican.

Audit firm KPMG has been called in to manage the retailer’s books and has opened an account through which creditors are able to track cashflows.

Nakumatt’s woes raise key questions as to how the retailer sunk into debt as it invested $4 million in five new branches in Tanzania, Rwanda and Uganda last year.

READ: Nakumatt Uganda landlord, suppliers go to court seeking over $0.5m

Mr Shah blames this on misreading the region’s economic growth prospects. “We anticipated steady growth over the past ten years. Unfortunately it flattened due to higher inflation and operating overheads,” Mr Shah said.

The retailer has recently closed five branches in Uganda, one in Kenya and scaled down warehousing. Employees are being paid on a weekly, rather than a monthly basis after going without pay in May and June.

READ: Nakumatt shuts three outlets in Uganda

The closure of the Ugandan units was part of the ongoing restructuring process initiated to stem extreme financial pressure that has resulted from a huge mountain of debt.

There is uncertainty of a different kind in Rwanda where Nakumatt has three branches. 

“The pending auction of Union Trade Centre by Rwanda Revenue Authority over tax arrears is the only thing that could disrupt our business in Kigali. We plan to move the store to Remera before the year ends,” Nakumatt Rwanda Country Manager Adan Ramata.