With KPLC performing a share capital restructuring during the 1st Half of 2010,What would be the likely 'new' capital structure? How would you perform the restructuring?Lets create possible scenarios and see which one will be closest come next year.

Let me propose my scenario:

From the information in the Nation Newspaper:


The authorised share capital of KPLC is Ksh 18B out of which Ksh 15.9B (90.72%) comprises of redeemable preference shares
87% of the redeemable preference shares owned by GoK are to be converted to ordinary shares via redemption.
The company will issue rights to existing share holders with the GoK renouncing its rights
The company will perform a share split

From the above info,let me create my hypothetical structure:

1. Conversion of preference shares to ordinary shares

Assuming the face value of the preference shares is the working figure,then 87% of Ksh 15.9B = Ksh 13.8B

Next question: What is the fair value of an ordinary KPLC share. Since this is a complex question,I will work from assumptions.

I will assume that the government would not unduly dilute the share holding of the existing private shareholders.Lets assume the new ordinary shares created for the GoK would be 79M (Total ordinary issued shares for KPLC becoming 158M ). NB: KPLC currently has 79M issued ordinary shares. The GoK already owns 40% of KPLC ie 32M shares,thus it would now have about 112M shares out of about 160M shares (70%)

As such,the GoK would have paid Ksh 174 per share.(ie Ksh 13.8B / 79M shares)Considering that KPLC made a net profit of Ksh 3.225B last year,the new EPS (factoring a doubling of issued ordinary shares) would be : Ksh 20 per share. Thus GoK would thus have bought the shares at a a fair P/E of : 174/20 = 8.7

2. Share split

With a new authorised share capital of approximately 160M Ordinary shares of par value of Ksh 20,a likely share split would be by a factor of 5. This would make the share capital rise to 800M authorised shares of a par value of Ksh 4. At this point,assuming the share is trading at a P/E of 8.7 (or at the GoK purchase price of Ksh 174),the split would ideally lower the new share price by a similar factor of 5 to approximately Ksh 35.(EPS of Ksh 4). After split,the GoK would now own 560M ordinary shares out of 800M.

3. Rights issue

The essence of the rights issue is to both lower the government stake in KPLC and raise much needed capital.

A rights issue of 2:1 (1 right for every 2 shares) through creation of 400M new ordinary shares would do the trick. If the newly issued shares are sold at Ksh 25 each,then KPLC would raise 400m X Ksh 25 = Ksh 10B.

With the GoK renouncing its rights (assuming it renounces all its rights),the GoK would finally own 560M out of 1.2B issued ordinary shares,effectively reducing its share holding to 46%.(Although it would still have an additional 350,000 7% cummulative preference shares,1,800,000 4% cummulative shares and the remaining 13% of the redeemable non-cummulative preference shares with a total worth of about it Ksh 2.1B).

NSSF currently owns about 7.9% of KPLC (6.3M ordinary shares).After split this would become about 32M shares. Assuming the GoK dictates to NSSF not to take up its rights,the final shareholding of NSSF would reduce to 2.7%.

Total GoK + NSSF shareholding would be about 49% hence avoiding KPLC from becoming a state parastatal.

Too many assumptions made but can form a basis for brainstorming on the likely scenario.

From the above scenario,its clear that the key for the restructuring is the price at which GoK acquires the ordinary shares(and hence the percentage ownership it will have in KPLC) as this will directly indicate the dilutional effect to the existing shareholders.

HAPPY HUNTING







Stocksmaster-For well researched market analysis

@stocksmaster
are you part of the restructuring team?,i will wait to see how different the final process will be from what you gave.Given the growth in kplc's profit i would put a premium on the P/e value,that means the dilution of existing shareholding will be reduced when the goverment forgo's its rights.
The existing shareholders should be prepared to snap as many as possible of the discounted rights to sustain value in their holings going forward.

see it through my lens?

@VVS,Didn't the Finance Bill say something about NSSF not being allowed to invest further in the NSE.. I think their situation is different from NBK's... They would be breaking the law!!

GoK to acquire ord shares at 3 month moving average of the share which is about 140,this is fair accounting practice,they get 99m shares or there abouts. All shares are then worth 65 bob or thereabout. a split of 1 for 5 to make shares worth 13 bob a piece and 4 at par. Rights issue to follow at 1new share for 2 held. This creates an additional 445 shares and in total 1335. GoK already owns 32m shares as we speak excluding NSSF's. They renounce their rights and retain their 657m shares and end up with 49% as they always wanted but with NSSF they control more than 50% as they would like. Rights to be valued at 10 bob,a 30% discount. KPLC raises 4.45B which they really don't need after capitalizing the 14B from prefs and their 3B retained in books,they are better off with a bond if they have any meaningful projects.

The rights issue is a token really to keep KPLC away from parastatal status and a 'woie' for shafting minorities...Folks this thing is a disaster for minority ordinary shareholders. If i were a minority ordinary shareholder i would be pushing for the company to pile up 20B+ debt in the books not a rights issue. The conversion and rights issue will only raise the cost of capital. I seriously can't see what new KPLC will do with the 5B to raise revenue other than just spending it on maintenance. This is the same company that is yet to resolve the 18% system loss almost 10 years later...I know there is the story of the old power lines blah blah but surely they can rewire the old lines.

The rosy revenue growth this year we all know was from shafting consumers with stupid and unsustainable power tariffs. Now Kenya is one of the most expensive power producers in the world. Tz,UG,Zambia are all behind us. Watch what happens all sane large power consumers like cement producers,steel makers,brewers will put up their own generation plants. Cement producers make up 12% of KPLC revenue,count that out in within the next 3years...this financial year revenue will grow by about 8% tops,most of the current adjustments are pass through- fuel and IPP related nothing for KPLC....So what's all the fuss about this utility. They are doing what Kengen used to do a while ago till they discovered the beauty of debt....if KPLC doesn't come for debt in the next 3 years,the CEO should be sent home.....

VVS

I don't follow what you are saying. 160 is this week. I forgot to tell you,three month average prior to date of announcement/notice...refers to CMA rules on material information. Now lets assume the government gets a huge discount say 50%. they buy them at 70....what do you think would happen? Gava will have more shares and dilute minorities even more. so not likely,then put a premium to say 200bob. Ask yourself why would gava pay for shares at 200 bob when they are retailing at 160?it wouldn't be allowed under accounting rules unless it was explicitly stated at inception of the prefs. The price to be used is 3-6 months moving average prior to announcement. Conversion doesn't mean 14B becomes 1.4b it means gava gets 99m shares of par value 20 bought at 140 each. you increase share capital by 398m and keep 13.5B in share premium. You can sit there in denial but expect this price at 65-70 or below

@kausha...yours looks the most methodical restructuring backed by open mkt valuation. However the main reason for rights issue is not to raise new funds (as it will)...but rather to sustain PRICE (at 140) as VALUE (that would've otherwise slumped to 65?]. This is a dangerous stock...

Playing the stock market without insider info...is like buying a cow in the moonlight.

VVS

There you go,the NAV per share drops whereas the NAV for the company doesn't drop. It drops because the are more ord shares than previously. If you are computing NAV per ord share now (before changes) you have to ignore the pref share value but in most cases we have tended to compute a 'raw' NAV which adds up the prefs amounts in shareholder funds but excludes the number of pref shares to total shares out issued. Now how do you convert the pref amounts into ord shares..?(i presume you are not an accountant nor have not been in a class where this was taught) You take the total value of prefs and create new ord shares. For parity you issue new shares at the price of existing shares in the market. Does this change the value of the company? not in this case simply because the prefs were earning nothing and the capital was long used and benefits enjoyed. Conversion of this nature happens in distressed companies and its used by willy lenders to gain equity and control when the company is struggling...It's clear KPLC can't repay this 'debt' not can it service it,and government is using one of its options to get back its value...at the expense of who? What does the market do...rush and buy the stock at even higher prices. Dilution will occur simply because you are creating more shares which are not being given to everyone and there is no capital injection. It's the same loaf divided more times,so a slice now cannot be the same size of slice when they are done with this. There is no quid pro quo here,its all quid pro quid,gava annihilating minorities. I am surprised there is no massive sell off of this share...

If the price the GoK acquires the ordinary shares is Ksh 140,then it will receive about 100M ordinary shares making its grand total to 132M shares out of 180M ordinary shares.

The new P/E would then be Ksh 3.225B/180M shares = Ksh 17.9

Assuming this conversion of preference to ordinary shares has already been effected and is only awaiting the AGM then the share is currently trading at a P/E of Ksh 160/17.9 = 8.9

The big question is wether this represents a fair share price for KPLC in light of the upcoming share split and more importantly,the rights issue.

Stocksmaster-For well researched market analysis

VVS

The clause comes into effect in January 2010... Until then (like they did with the NBK shares) they can continue resisting.... If this restructuring occurs in 2010,any attempt to invest further would be an illegality....

That is how this differs from the NBK saga....

REF sales are losses (kogelo isn't a hotbed of industry...) but the GoK funds those losses. I am not sure when GoK pays KPLC but the REF sales are subsidised.

Even in developed countries,inter-connected sales are subsidised in lieu of installing stand-alone generation capacity.

KPLC remains a distributor not a 'supplier'.

Greedy when others are fearful,Very fearful when others are greedy - to paraphrase WB