Why it will take more than Sh5bn to revive Mumias

On Friday, Deputy President William Ruto brokered a deal to rescue Mumias Sugar Company from imminent collapse.

The plan, however, is seen as more informed by politics than financial viability of the once vibrant miller.

A revival analysis report by audit company KPMG and delivered to seven banks — EcoBank, KCB, CfC Stanbic, Barclays Bank, Commercial Bank of Africa, Proparco of France and Co-operative Bank — in December last year indicates that Mumias would need to raise its debt level to at least Sh13 billion in order to be back to profitability by 2019.

The Ruto-backed deal, however, offers the miller Sh5 billion with taxpayers injecting Sh1 billion. Shareholders are expected to raise Sh4 billion through a rights issue.

At Sh2.70 a share, the miller needs to double its share capital (currently at 1.5 billion shares) to secure Sh4 billion. In an ideal market, a cash call is usually heavily discounted to attract investors.

“The company currently needs to bridge a funding gap of Sh3 billion in order to sustain operations to June 2015,” a turnaround plan prepared by the current board reads.

TURNAROUND STRATEGY

Mumias went on default on June 2014 with the seven banks contemplating placing it under receivership.

But the politics of placing another company in western Kenya under receivership (after PanPaper) could have slowed down the process, eventually bringing in the government.

At the moment, Mumias Sugar shoulders Sh10.2 billion debt and the management says it urgently needs money to service the loans.

Seven lenders are collectively owed Sh6.5 billion by Mumias. Suppliers and other creditors are demanding Sh1.5 billion, while the taxman wants Sh2.2 billion.

With such a huge debt and management structures, whose effectiveness has been questioned, the miller has turned into a black hole of sorts for cash.

The turnaround strategy prepared by the board identified prioritising farmers, revamping the firm’s sales model and trimming staff numbers in order to boost efficiency.

With the banks declining to put in more money, however, it seems the only faith the seven lenders had in the deal was the appointment of their adviser, KPMG, as the statutory manager to run the show.

About 300 employees and half of the board are expected to go home as part of revival efforts.

Three years since 2012 have been long and torturous for the listed company, its shareholders and other stakeholders, especially the farmers. The company was until last month on the brink of collapse.

It is now evident that Kenya’s largest sugar manufacturer can no longer finance its business and has to turn to shareholders and taxpayers at least for the next five years.

The company will technically be placed under statutory management.

Two weeks ago, the government is said to have trashed a strategy by the current board led by chairman Dan Ameyo on the premise that  the board is part of the miller’s problems  and needs overhaul.

HEAVILY INDEBTED

Creditors too, led by the seven banks, had lost trust in the board and the top brass and wanted them out as a condition for fresh loans.

The revival analysis by KPMG was also aimed at advising the lenders on whether the firm could repay its debts or it could only be put under receivership.

The review, seen by Smart company, gave guidelines that would see Mumias make profit by 2019.

KPMG advised that all the outstanding overdraft facilities (credit received from a lending institution when an account reaches zero) to Mumias of Sh1.6 billion be converted into loans.

Further, all existing loans of Sh6.5 billion be given a two-year break without any interest or principal repayments starting January 2015 and the same be restructured after the break.

“The loans are then paid back monthly on a five-year fixed repayment period exclusive of the moratorium (repayment break),” said the audit firm.

Should the lenders agree to the proposals, KPMG noted that Mumias would in turn need a fresh five-year Sh3 billion loan with a 24-month break on interest and principal repayment.

The new loan would push Mumias' total debt to Sh13.2 billion but it would give it the much needed working capital and generate revenue with KPMG saying the miller should have serviced a huge chunk of the loan by 2019.

“All interest on the loan are assumed to be 15 per cent… in the proposal, lenders will have recouped 41 per cent of debt by financial year 2019,” said the audit firm.

As at the end of 2013/14 financial year, said KPMG, Mumias Sugar had defaulted on all loans including overdrafts therefore straining its relationship with lenders against an ever decreasing working capital.

Working capital finances a firm’s operations. The higher the working capital, the better because it means a company is making good sales.

POOR MANAGEMENT

“Mumias net working capital has been decreasing from a positive working capital of Sh3.5 billion in financial 2012 to a negative of Sh1.8 billion in the three months to September 2014,” the report said.

In January this year, it is understood that Mumias had resorted to asking its distributors to pay the farmers directly. The firm was, however, reprimanded by the ministry of Agriculture.

The quagmire was as a result of loan defaults. Mumias could not easily access money deposited into its bank accounts, exacerbating its cash flow woes.

KPMG also cited Mumias’ poor management of its suppliers of cane, its core raw material for sugar production, ethanol distillation and co-generation.

Poor farmer management is attributed to Mumias’ loss of contracted cane to rival millers as farmers renege on their agreements seeking better returns and prompt payments. “Mumias has not had good relationship with its suppliers of late as poor payment terms has led to outgrower farmers divesting from sugar cane plantation with the ripple effect leading to decreasing raw material.”

Loopholes exploited

A five-year review since 2011 showed that cane has been consistently harvested before maturity, a pointer to decreasing raw material supply due to farmers’ apathy.

A forensic audit by KPMG has also revealed massive loopholes that were exploited by company bosses.

Any time this week, KPMG is expected to start implementing the bold turnaround strategy, which is understood to have been so much driven by lenders, who have been told by the audit firm that Mumias Sugar Company is still a viable enterprise.

“We have to take these measures so that farmers in the region can be paid for delivery of sugarcane,” Mr Ruto said.

ABETTING MISMANAGEMENT

The turnaround will involve weeding out sugar brokers, who are said to have made Mumias’ sugar uncompetitive.

The KPMG report notes that Mumias Sugar distributor arrangement as is presently structured, leaves the company at the mercy of its distributors.

“The company faces the risk of sabotage by its distributors, due to concentration of risks where approximately 60 per cent of all sugar sales are made to six distributors,” said KPMG.

In essence, the country’s largest miller takes away the ability to control prices of its own products and gives it to a few distributors who are part of a cartel that has seen Kenyans pay more for sugar compared to consumers in other East African nations. 

It is therefore an uphill task turning around sugar revenues that have been on a downward spiral from a high of Sh14.8 billion in 2012 to Sh1.6 billion in the three months to September last year.

Former bosses have been accused of  abetting the running down of the miller.

Evans Kidero, who was the managing director from 2003 to 2012 is accused of awarding tenders to bidders with higher quotation, and who had submitted bids long after the bidding had been closed.

• Peter Kebati, who succeeded Kidero,  is on the spot for releasing a boiler that had been sold, even before full payment had been made. He also allowed for single sourcing of services.

• Peter Hongo, a former business development manager,  is said to have recommended discounts to customers over and above approved rates.

• Former commercial director,  Paul Murgor, was aware transporters were diverting goods meant for inter-warehouse transfers but still paid them in excess of Sh62.9 million. 

• Former legal affairs director Emily Otieno is on the spot for instructing Murgor to provide less facts to the board on a dubious importation deal. She also advised Mr Kebati to single source legal services.

ANATOMY OF A CRISIS

KPMG audit reveals rot in sugar miller 

• As at the end 2013/14 financial year, said KPMG, Mumias Sugar Company had defaulted on all loans portfolio including overdrafts thus straining its relationship with lenders against an ever decreasing working capital.

•  KPMG cited Mumias’ poor management of its cane suppliers. Cane is the core raw material for the miller’s three units — sugar production, ethanol distillation and co-generation

•  A five-year review since 2011 showed that cane has been consistently harvested early before maturity, an indication of decreasing raw material access due to farmer’s apathy.

•  According to the KPMG business review report, Mumias Sugar Company’s distributor arrangement as is presently structured, leaves it at the mercy of its own distributors.