Mergers, Acquisitions and Financial Results

It all started in December 2003, when Naushad Noorali Merali, a Kenya businessman was in a reflective mood while on a pilgrimage to Saudi Arabia to pay tribute to his God, Allah.

An official from Vivendi Telecoms placed a call to Merali and informed him that his French based business partners had signed an exclusive contract to begin the negotiations for the sale of KenCell Communications to South Africa's mobile phone giant, MTN.

Though Merali, through his holding company, Sameer Group — which is named after his only son and child — owned 40 per cent of KenCell Communications, the call did not bother him much. At 53, Merali is at his prime and one of the richest businessmen in Kenya. Today, he controls companies with over Sh20 billion in assets. His personal wealth is also calculated to be over Sh20 billion.

In September 2002, he had received a similar call from Vivendi informing him that they were placing their majority 60 per cent shares on the market. This had sparked off a neck-to-neck battle among African telecommunication giants as they angled to buy out Vivendi's shares in Kenya's second biggest cellphone operator with 1.2 million subscribers. In the tumultuous waters of global high finance, telecom players were suffering and bidding in new GSM auctions, and take-overs were a big no among investors. But in Africa, the frenzy was not over as the bid for KenCell revealed. In the last few months, Kenya has been a major battleground in the quest by MTN and Celtel to lay siege on the sub-Saharan Africa mobile phone market.

The Kenyan operation was attractive and successful business with an established revenue base, positive cash flows and good brand equity. This was not a typical telecom start-up that is notorious for hogging horrendous amounts of cash and only promising a theoretical payback. International financiers that would fund such a deal were already neck deep with enough telecom disasters. This is what had precipitated the call from Vivendi.

In the go-go era of Internet boom, Vivendi Universal under the leadership of Jean Messier had gone on acquisition binge and piled up a mountain of debt on its balance sheet. Then it made sense, with international stock prices at an all time high, companies like Vivendi could use their equity to fund acquisition and piling up more debt. After all, with telecom companies managing millions of clients, it was unimaginable that it would be hard to make money from these customers. This is why a company like Vivendi readily agreed to shell out Sh2 billion (US$27 million) for a mobile phone license in Kenya for an operation that only promised to add 50,000 subscribers at the time.

Then the stock market crashed and the aftermath was huge piles of debt that in the case of Vivendi almost took the company to the bankruptcy court. This was forestalled by the company deciding to sell off its assets and pull out of Africa in May 2002.

When Merali was informed of Vivendi's decision to bail out, he says that he was not concerned. He held the ace card that he would reveal one and half years later.

The matter, however, gained urgency after Vivendi went exclusive with MTN. Interviews with people involved in the deal reveal that Merali was not happy with the prospects of partnering with a South African firm.

"The MTN people came to see me here in my office during the due diligence," says Merali. He was, however, not impressed with their attitude. The chemistry was all wrong. Since South Africa gained independence, its businesses have failed to make a foot-hold in corporate Kenya. Even in situations where they have bought out companies, they have been unable to make a success of their investments. Take the monumental failure that SABMiller (formerly South African Breweries) made of its Castle Brewing business. This history worked against doing a deal with South Africans. In the case of MTN, even Kenya's mobile phone giant, Safaricom did not relish the opportunity to lock horns with the South African giants because of its bare-knuckled marketing aggression. KenCell's management was also not too keen.

However, had MTN utilised the opportunity of asking Cyril Ramaphosa, one of the company's leading shareholders and a rising star in South Africa political and business circles, Merali said that they would have clinched the deal with no objections.

However, in March 2004, an executive from Vivendi flew down to Nairobi to inform Merali that they had signed a contract agreement to sell their 60 per cent stake to MTN for Sh18 billion (US$230 million). At the time, MTN had already started leaking stories to the South African press that it had clinched the deal.

Then the situation began to cause anxiety on Merali's side and he decided to draw reveal his hand by informing Vivendi that he was reserving his options to excise his pre-emption rights (meaning the first right of refusal to buy Vivendi's shares in KenCell).

"We had a board meeting here [the Sameer headquarters on Riverside Drive] and formalised the deal," says Merali.

Contractually, Merali had 20 days to express his intention to excise this pre-emption option and 15 more working days to raise the cash. In this case he was supposed to match up the Sh18 billion that MTN had put on the table. Basically, Vivendi would require a bank guarantee to prove that the money was there.

In the course of MTN's due diligence, Merali had renewed contact with his long time friend, Dr Mohammed Ibrahim alias Mo, the founder and chairman of Celtel (formerly MSI Cellular).

"Mo and I have been friends for a long time and I admire him a lot," says Merali. As MTN was flexing its muscle, it seems that Merali had all along been considering blocking the South African bid. After he exercised his pre-emption rights, there were renewed negotiations with Mo, which eventually led to Celtel providing a bridging loan to Merali to buy out the Vivendi shares. Celtel had tried unsuccessfully to get into the Kenyan mobile phone business three times in four years.

"At exactly 7.00 PM on Monday night, I signed the sale and purchase contract with Vivendi at the board meeting," says Merali, "The place was packed with lawyers." The price Sh18.4 billion (US$230 million)— calculated at a dollar price of Sh80. He now owned 100 per cent of the company.

All this time, the Celtel group was waiting in another room. After buying the shares, Merali and his team rushed to meet the Celtel team led by Dr. Ibrahim for another round of negotiation.

"At roughly 9.00 pm, I sold the shares to Celtel for Sh20 billion (US$250 million)," says Merali.

Though Merali says that the Sh1.6 billion (US$20 million) difference between what he gave Vivendi and what he got from Celtel went to paying lawyers, accountants and bankers, it is highly unlikely that a sizeable portion of this money did not result in a profit for him.

Even more important, Merali got a market valuation for his 40 per cent stake in KenCell. At the Celtel purchase price of Sh20 billion, the deal priced the entire company at Sh33 billion shillings. The Financial Standard now estimates Merali family's wealth in KenCell at Sh13.3 billion. At the current valuation, KenCell would rank as the fourth largest company in Kenya in terms of market price after Barclays Bank, East African Breweries and Standard Chartered. Its rival Safaricom would, however, be by far the biggest company in Kenya if it was to get a public valuation.

Dr. Ibrahim is, however, happy with the valuation of KenCell.

"We are coming here with a strategy of growth," he said. Celtel funded the deal internally as well as raising an additional US$200 million from equity investors. In the coming expansion phase at KenCell, Celtel will invest an estimated Sh32 billion (US$400 million).

The take-over of KenCell has, however, brought to fore important lessons to Merali when dealing foreign investors. This is an everyday lesson that most African entrepreneurs have learnt in the hard way and often tearfully.

"The foreigners from America and Europe are not here for the long run," says Merali, "They tend to run away at the first sign of trouble. That is why we were fighting for a black face to be our partner and Mo fit this profile."

Merali had seen it all before and—despite his misgivings about the fickle relationships that African businessmen suffer when they enter into joint ventures with corporate giants from the US and Europe — he had profited immensely from this association. As 25-year-old, fourth generation, Kenyan Asian youth, he started transforming himself into a corporate titan and a billionaire to boot by buying out distressed companies owned by departing foreigners. He was born on January 2, 1951.

"I started doing buy-outs long before the word became fashionable in Kenya," says Merali.

In 1975, two years after joining Ryce Motors as the finance manager, Merali convinced Frank Ryce, the owner of the firm, to sell him his business.

Then it was a scrappy dealership for Skoda located at the Kenol Petrol Station on Gitanga Road in Kileleshwa. It employed 25 people and by the standards of mid-sized businesses in Kenya it was going nowhere.

Merali had no experience or vision for buy-outs before this deal, but in his usual sense of determination and persuasiveness, he convinced the Commercial Bank of Africa (then Bank of America) to lend him Sh600,000 to buy out Ryce Motors. He proceeded to acquire the franchises for Daihatsu and Komatsu working with his wife who owns half the shares in Sameer. When he bought the company, it was grossing less than Sh4 million a year, today the revenues from Ryce Motors stand at Sh500 million and it employs 250 workers.

After the 1975 deal, it took another eight years before he got into the acquisition business big time. This time, in 1983 he founded the Equitorial Bank, which was then a non-banking finance house.

In 1984, he pulled a major trick by leading the buy-out of Commercial Bank of Africa (CBA), the Bank of America who were the principal owners and were divesting out of Kenya. Merali organised a local consortium to fund the deal, which at the time cost Sh85 million (US$6 million).

This deal was financed by local banks such as Standard Chartered. At the time of CBA's acquisition it was making a profit of Sh5 million, last year it made nearly Sh600 million and boasts an asset base of Sh18.3 billion. Merali owns a 14 per cent minority stake in CBA. When CBA is valued on an equivalent market basis for banks of similar size and reputation in Kenya its market size is equivalent to Sh8 billion — which brings Merali's stake to Sh1.1 billion.

The next big deal for Merali was the buy-out of Firestone US stake in Firestone East Africa in 1985. The deal was funded by bank loans. "I bought 51 per cent of the company for Sh165 million (US$8 million)," says Merali. He would make millions of shillings later when the company was floated on the Nairobi Stock Exchange in 1994 at price of Sh35 per share. Merali's 65 per cent stake in Firestone East Africa today is valued at Sh1.5 billion.

In 1987, Merali bought out First American Bank of Kenya from First Bank of Chicago for undisclosed sums. Over the years, Merali has built a corporate empire around his Sameer Group. He has stakes in Sasini Tea and Coffee — he owns a 55 per cent stake worth Sh556 million, H Young & Company, a leading engineering and construction firm,. Eveready Batteries, Ryce Engineering, which are in energy and power sectors. He has stakes in Swift Global and Oel Sysnet, IT companies and Yamsam Motors. All these companies own many other subsidiary and associate companies.

A recent deal that caught the market off-guard was his acquisition of East African Cables — a copper cable manufacturer — in October 2000. Merali says that he accidentally bumped into the officials of Delta Group Plc, the owners of East Africa Cables and they struck a deal. With the Kenya economy suffering for a major depression, the UK company wanted to get out of Kenya and Merali, despite East African Cables sagging fortunes saw a major arbitrage opportunity.

He bought out Delta's 75 per cent equity in the company for a reported Sh6.8 per shares, which amounted to a total of Sh104 million. In late March 2004, Merali surprised the market when he sold off the company to a group of local investors for Sh15 per share — a total market purchase price equivalent to Sh230 million. This arbitrage opportunity netted Merali a cool profit of Sh126 million. Mind you, there is no capital gains tax in Kenya, a fact that Merali accepts, happily.

Though East African Cables faced grim earnings prospects in the middle of the economic downturn four years ago, for Merali, it represented an opportunistic acquisition. Indeed, the company's profitability continued to go down in the period that Sameer owned it.

"East African Cables presented a unique opportunity and problem for Sameer," says Merali, "This is because it did not fit with the rest of the portfolio."

This argument might look a bit overblown when East African Cables is fitted in the carefully planned jigsaw puzzle of Sameer's company portfolio. East African Cables was a perfect vertical expansion for the group because it complemented construction and energy divisions. It's key failing however is size.

"East African Cables was too small and it fitted awkwardly with the rest of the portfolio," says Merali. During Kenya's recession, most of his businesses suffered falling profitability. This could probably lead Sameer to do more deals to diversify its portfolio risk.

For his age, Merali has done well for himself. He likes presenting himself in folksy manner and even making self-deprecating jokes about how his wife controls half of his wealth and has rights to fire him.

He claims that he returned home to Kenya in 1973 from the UK where he was working as an chartered accountant because his mum had missed him too much and had found a girl for him to marry (his wife). His great- grandfather , a spice and cotton trader, had emigrated to Kenya from India in 1883 and settled in Lamu. Merali was born in Mombasa, but he grew up in Moshi town, Tanzania before returning to Kenya to finish high school at Highway Secondary.

While Merali's career is an uplifting tale of Kenyan striving, he says that there are people who claim that he got where he is because of political patronage.

"This is far from the truth," he says, "People in Kenya say that you cannot be successful if you are not crooked. I wonder how you can be successful if you're not straight in your business dealings. We value transparency and we have even put all our results on the Internet for the world to see."

This is how Vivendi got to know of him and when they met at the World Economic Forum they approached him to join hands to bid for the second GSM license in Kenya. All too good for a man you never thought of owning a mobile phone company. Sameer is owned 80 per cent by Merali and his wife, 18 per cent by the Ndegwa family and 2 per cent by De Gama Rose family.

Eastern Standard