Supermarket chain Tuskys is seeking to sell a majority stake to a consortium made up of a private equity firm and an undisclosed foreign retailer as part of efforts to raise cash to pay suppliers and win back their confidence.
The retailer’s rescue plans have been disclosed by a transaction adviser and the Competition Authority of Kenya (CAK), which is supervising the company’s settlement of supplier dues worth billions of shillings that remained unpaid for months.
If successful, the proposed deal will mark the latest share deal in the increasingly competitive and capital-intensive supermarket business.
Tuskys’ top rival Naivas, for instance, recently raised more than Sh1.5 billion from a consortium of investors, including the International Finance Corporation (IFC) and private equity firm Amethis for expansion.
“The shareholders of Tuskys have communicated that they are also exploring other funding options, including seeking a strategic investor by July 31, 2020,” the CAK said in a statement Monday.
The regulator said that should an investor apply to acquire a significant stake in the retailer, the review of such a filing will be fast tracked.
“The Authority took note of these initiatives and has thereof committed that, if the retailer opts to seek a strategic investor, the Authority shall within 14 days, and in accordance with the provisions of the Competition Act, consider and issue a determination upon submission of a merger/acquisition application,” the CAK said.
A transaction adviser tapped to guide Tuskys on the deal reckons that the family-owned retail chain is seeking to sell a majority stake to a PE firm and a supermarket operator.
“The discussion is around a majority stake and we are looking at PE fund together with an operator of a major supermarket,” said the adviser who sought anonymity.
Tuskys is expected to benefit from the supply of both new capital and technical expertise in operating a major retail chain.
For weeks now, shoppers have complained of missing essential goods on the retailer’s shelves, suggesting that some suppliers are severing ties with the company amid a cash crunch, which the retailer has blamed on restrictions imposed to curb the spread of Covid-19.
A director at Tuskys confirmed the discussions over sale of a majority stake, adding they are at a delicate stage.
The proposed transaction, if successful, will see the new investor take control of the board and management of the family business that was founded by the late Joram Kamau.
Mr Kamau left the retailer in the hands of his children, according to disclosures in a past court case.
Stephen Mukuha, Sammy Gatei, Yusuf Mugweru and George Gachwe were listed as owning a 17.5 percent stake each in the company.
John Kago, Mary Njoki and Mary Njeri (deceased) each held a 10 percent stake.
Nearly a decade ago, the retail chain was rocked by a family feud that threatened to tear it down.
From the humble tiny shop Mr Kamau set up in Rongai town, Nakuru, in the early 1980s, the business has grown in leaps and bounds into the giant Tuskys with 53 stores, making it Kenya’s second biggest retailer behind Naivas.
But cracks have emerged in the retail chain recently, underlined by the troubles in settling supplier dues on time.
This prompted the competition watchdog last month to order Tuskys to settle overdue supplier debt worth Sh1.29 billion by between July 1 and July 16.
The proposed Tuskys’ equity sale comes in a period when PE funds and foreign retailers are seeking a piece of the Kenyan market where the collapse of Nakumatt, one of the major players in recent years, has left a gap.
The dissolution of the Nakumatt business created an opening for other international retailers, including France’s Carrefour and South Africa’s Shoprite, increasing competition in the retail space.
Tuskys has already made progress in reducing its liabilities ahead of the proposed entry of the new investor.
“Over the past 30 days, the Authority has held four meetings with Tuskys to review the documentation submitted and interrogate its proposed debt settlement plan,” the CAK said.
“Tuskys has provided documents indicating that it made payments to suppliers amounting to Sh2.77 billion in June 2020 as per the Authority’s order.”
Tuskys became the first major retailer to face the scrutiny of the CAK’s Buyer Power Department that was created after former supermarket giant Nakumatt Holdings went under with Sh18.5 billion of supplier debt.
Nakumatt’s total liabilities amounted to Sh35.8 billion, including bank loans (Sh6.9 billion) and commercial paper (Sh4.7 billion).
Buyer power means the ability of a purchaser to extract more favourable terms from a supplier on whom it can also impose significant opportunity costs by, for example, delaying payments.
A group of suppliers reported Tuskys to the regulator following the retailer’s default, based on the terms laid out in their various agreements.
Milk processor New KCC is among the companies that stopped supplying Tuskys owing to the pileup of unpaid debt, causing stockouts of essential items on the retailer’s shelves.
The CAK says Tuskys has presented a new plan to settle the outstanding supplier debt over the next four months.
“The Authority shall conduct compliance checks on a weekly basis to ensure adherence to the presented debt settlement plan,” the regulator said.
“Lastly, as the Authority continues to interrogate the financial statements, and management accounts made available by Tuskys, we call upon suppliers who may be aggrieved, and have not presented their matters to the CAK, to continue doing so. This will enable the Authority to establish Tuskys’ accurate debt portfolio.”
The fact that the regulator is monitoring Tuskys’ operations is expected to give confidence to suppliers, including some whose business with the retailer runs into hundreds of millions of shillings per year.