Cipla’s takeover by Capital Works stirs Uganda market

Monday November 20 2023

Staff at the Cipla plant in Luzira, Uganda. Cipla Quality Chemicals is a prominent manufacturer of anti-retroviral drugs. PHOTO | COURTESY


The recent approval of a takeover of Cipla Quality Chemicals Ltd by a regional competition regulator has slightly raised investor expectations at the Uganda Securities Exchange (USE).

Cipla Quality Chemicals Limited is a prominent manufacturer of anti-retroviral drugs used in the treatment of HIV/Aids plus malaria, tuberculosis, and hepatitis medicines in Uganda.

The Common Market for Eastern and Southern Africa (Comesa) Competition Commission approved the transfer of majority shares in the company last month from Cipla India Ltd to Africa Capital Works SSA, a subsidiary of Capital Works Ltd, a US-based private equity firm.

Read: Cipla bounces back to profit-making territory

The share price slightly increased from Ush65 ($0.017) to Ush70 ($0.018) shortly after news of the Comesa approval filtered into the local stock market. Under the terms of the takeover deal, Africa Capital Works SSA 3 has acquired 51.18 percent shares from Cipla India Ltd while SCB Mauritius a/c Capital Works SSA 1, a sister company to the former also acquired 11.15 percent shares, according to a corporate notice issued last week.

The acquisition took effect November 14, 2023 and the official name will revert to Quality Chemicals Ltd following the change in ownership. The Cipla counter at the USE registered minimal trading activity on November 15, while its share price remained stable at Ush70 ($0.018) as investors digested the new developments.


Capital Works previously owned eight percent shares in Cipla Quality Chemicals Ltd, but exited the business after the company’s Initial Public Offering that was concluded in September 2018.

Other shareholders in the firm include Uganda’s National Social Security Fund, which owns 7.38 percent shares in the company. The share price has sharply dropped from Ush256.5 ($0.07) during the IPO window to Ush70 ($0.018) posted at the end of October under pressure from weak revenues, limited product innovation, and slow expansion activity across the continent.

Whereas the return of Capital Works to the drug manufacturer’s boardroom seemingly promises better days ahead for some investors, a series of unanswered questions related to commercial strategy have clouded the US investor’s second homecoming. Is Capital Works ready to throw cash at the firm’s product research and development unit? What are the top priority capital expenditure projects for the new majority shareholder? Does the new investor possess a magic bullet for troublesome, government drug supply contracts? Would Capital Works mobilise new, private sector clients for the drug manufacturer?

“I don’t understand Capital Works’ motives in rejoining Cipla Quality Chemicals. Private equity firms are notorious for switching investment positions at will. Anyone that chooses to invest in the pharmaceutical business must have a core understanding of its business model and the ability to control cashflows to their advantage,” said Mubbale Kabandamawa Mugalya, Investment Manager at Sanlam Investments Uganda Ltd.

Read: Drugmaker Cipla exhibits signs of ill financial health

“That acquisition might not heal the pain suffered by retail investors who bought Cipla shares at Ush256.5 ($0.07) during the IPO offer period and are stuck with that stock today at less than Ush90 ($0.02) per share. Their plight is likely to haunt our stock market for a long time to come,” observed Simon Mwebaze, UAP-Old Mutual Financial Services Uganda CEO.

The drug manufacturer’s total sales revenues fell from Ush267 billion ($70 million) in March 2022 to Ush221 billion ($58 million) by the end of March while profit before tax dropped from Ush37.8 billion ($9.95 million) to Ush31.8 billion ($8 million) during the same period under review. Total assets declined from Ush246.7 billion ($64.9 million) in March 2022 to Ush213 billion ($56 million) by the close of March 2023, the firm’s latest financial results say. Total inventories also dropped from Ush80 billion ($21 million) to Ush66 billion ($17 million) during the period under review.

A fresh profit warning issued last week could complicate matters for the new majority shareholder in light of more than three negative earnings alerts published over the past five years.

“Cipla Quality Chemical Industries Limited (the Company) wishes to inform its shareholders and potential investors that the company’s profit for the half year ended 30 September 2023, will decline compared to the same period in the previous year. The higher profit in the previous year was mainly due to the recovery of a trade receivable from the Government of Zambia, which had been fully impaired,” reads part of the profit warning.

Read: Cipla share price rises on $12m debt sale talks

The new majority investor is to be unveiled to market players before the end of November.

“The return of Capital Works to Quality Chemicals might eliminate technical fees charged by Cipla India every year. This will eventually boost the company’s earnings in the medium term. But serious problems relating to government bureaucracy, corruption, and dodgy/vested interests could complicate Capital Works’ efforts in restructuring government drug supply contracts,” said Andrew Muhimbise, a retail investor at the USE.

“Details surrounding that transaction are still confidential and I’m not privy to conversations connected to this matter. For this reason, I am unable to discuss the rationale for the shareholders’ choice that favoured Capital Works and not any other investor,” noted Peace Namara, Investor Relations Manager at Cipla Quality Chemicals.