The relative value of Housing Finance buyout by Britam

Monday July 14 2014

Ambassador Francis Kirimi Muthaura and his son Mr Paul Muthaura. From the regulatory power vacuum and cross-ownership to the father-son relationship, the transaction has the perfect ingredients of a thriller. PHOTOS/FILE

Ambassador Francis Kirimi Muthaura and his son Mr Paul Muthaura. From the regulatory power vacuum and cross-ownership to the father-son relationship, the transaction has the perfect ingredients of a thriller. PHOTOS/FILE 

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It is not often that a son gets to decide the fate of a father’s big investment decision.

But as destiny would have it, Mr Paul Muthaura, the longest-serving acting chief executive of the Capital Markets Authority (CMA), will have the duty of approving or vetoing the dream of his father, Ambassador Francis Kirimi Muthaura, who wants to tighten his grip on the country’s main mortgage financing company.  

Two weeks ago, Britam — chaired by the elder Muthaura — entered into a sale agreement with Equity Bank to acquire the bank’s 24 per cent stake in Housing Finance (HF).

The deal is valued at slightly more than Sh2 billion. With the three companies listed at the Nairobi Securities Exchange, the rules of the game mean that the Capital Markets Authority must approve or veto the purchase.

Paul, the son of Mr Muthaura — former Cabinet Secretary and head of the civil service in Mr Mwai Kibaki’s government — will have the task of making the final call on the deal.

Mr Muthaura was appointed to chair Britam’s board of directors in November last year.


“It is a very tricky and interesting situation, both because of the relationship between the parties involved and the uniqueness of the transaction,” an analyst who declined to be named said in a telephone interview.

However, it is the nature and timing of the deal that has aroused interest in how CMA will handle the approval process. The CMA boardroom currently has a power vacuum after four directors, including chairman Kung’u Gatabaki, left at the end of May.

The fact that directors have not been appointed to replace the retired ones, with the institution yet to get a new chairman, means the buck stops with the CEO, Mr Paul Muthaura. 

It is, however, the exit of Mr Gatabaki that adds a twist to the intrigues. Mr Gatabaki was not just CMA's chairman, he was also the board chairman of Housing Finance — the subject of the sale.

Mr Gatabaki was forced out of HF in 2010 after Britam and Equity jointly bought Commonwealth Development Corporation’s 24.9 per cent stake in Housing Finance, valued at Sh1.1 billion.

The deal was concluded in 2007, but it was not until 2010, when the two firms increased their stake in HF to 37.31 per cent, that they staged a coup against Mr Gatabaki. He was replaced by Equity Bank chairman Peter Munga.


Mr Gatabaki would, however, find favour with then President Kibaki. He was appointed the CMA chairman. Perhaps wounded by the vicious boardroom battle, Mr Gatabaki would lead a battle to “enhanced corporate governance.”

Some players said he was out to settle scores with the people who pushed him out through what he reportedly felt was an irregular process owing to weak regulation on governance.

The HF deal, coming so quickly after his exit, is raising eyebrows. Also, while on paper Equity Bank and Britam exist as different entities, in reality the two are led by personalities who are bound by common business and commercial interests through cross-ownerships.

Mr Munga doubles as chairman of Equity Bank and Housing Finance. Equity Bank CEO James Mwangi also sits on the board of Britam. On the other hand, Britam’s group CEO Benson Wairegi sits on the board of all the three companies.

This technically means the three firms are privy to each other’s strategies, a factor that has raised eyebrows with regard to competition in the industry.

Britam holds a 10 per cent stake in Equity Bank while Equity holds a 21.4 per cent stake in the investment firm.

In an interview with Smart Company, Mr Muthaura said the situation is interesting but that the regulator has a clear way of ensuring there is no conflict of interest in analysing and determining such a transaction.


“Yes, he (Francis Muthaura) is my dad, but the authority has a clear way of dealing with mergers or other transactions in which there is perceived to be (a) conflict of interest. I most likely will not be part of the team that looks into that transaction,” Paul said.

It is unlikely that a new board or chairman will be appointed soon as the government moves to consolidate regulation of the financial sector according to the recommendations of the Presidential Task Force on Parastatal Reforms.

The task force recommended the creation of an umbrella financial sector regulator that brings under one body the Insurance Regulatory Authority, CMA and the Retirement Benefits Authority. Implementation of this recommendation is what has held back the constitution of a new board of the CMA.

But while Paul might be left out of the committee that looks into the Equity-Britam-HF transaction, his position as the ultimate decision maker at the regulator will definitely influence the deal.

The transaction is central to Britam’s agenda as it seeks to grow its footprint in the real estate sector in a bid to diversify revenues.

Its success would raise Britam’s stake in HF to 46 per cent, giving it an opportunity to play a central role in the real estate sector without having to start from scratch.


“Britam is going big on real estate. They will need HF to help get their property to the market through mortgages. On the other hand, HF needs a good deal on insurance of its mortgages.

“Equity Bank is currently in search of funds to meet the new banking capital requirements. It is a win-win situation for all the three,” said Mr Kuria Kamau of Kestrel Capital.

Other regulators expected to approve the deal are the Central Bank and the Competition Authority of Kenya.

Mr Wang’ombe Kariuki, director general of the Competition Authority of Kenya, said his institution was yet to look into the operations of the three firms. He said he had not considered the proposed transaction.

“Let me not comment on an issue the authority is yet to analyse and determine since doing so could be prejudicial. However, the authority will diligently consider the transaction in respect of the criteria established under the Competition Act,” Mr Kariuki said.

“Competition and (the) public interest are the key concerns for us when we consider a merger.”