The moment the receivers of the troubled Webuye-based Pan Africa Paper Mills Ltd (Panpaper) put the company on sale, is when the vultures started circling the carcass, waiting to swoop on this distressed firm at the earliest opportunity.
Indeed, buying a distressed company, or a firm being auctioned by the government in a privatisation transaction, has become a fashionable way of making big money in Kenya.
In Panpaper’s case, there was opportunity to make big bucks by stripping its assets.
It is noteworthy that at the time the receivers were taking over six years ago, the assets of the company were valued at Sh18 billion.
There was also money to be earned from the value that had been created from the more than Sh2 billion the government had pumped into the company as it tried to revive it.
As it turned out, the battle to clinch the lucrative deal eventually narrowed to a two-horse race: Between famous timber merchants and one of the largest family-owned conglomorates in East Africa – the Rai Group, in one corner, and a medium-sized Ruiru-based paper maker, Juja Pulp and Paper Mill Ltd, on the other.
The Rai Group, with extensive interests ranging from pulp and paper plantations, paper manufacturing and sugar production – in Uganda, Kenya, and Malawi – were all along regarded as the top contenders.
Indeed, it was all assumed that it would be a walk in the path for the Rai Group.
But as it was to turn out, Juja Pulp and Paper Mills, which is owned by the Gudka Group of companies, confounded pundits by putting up a stiff challenge to the Rai Group’s bid.
With the race approaching the finishing line, an explosive controversy erupted between the receivers and the Ministry of Industrialisation, with the receivers citing interference in the sale process.
In a drammatic development, the receivers – Messrs Ian Small and Kieran Day of the insolvency practice Bregbies and Traynor Ltd – abruptly resigned.
The disagreement left the receivers and the industrialisation ministry exchanging acrimonious letters.
From the evidence, the bone of contention was the receiver’s feeling that the government was leaning on one side between the two bidders.
According to correspondence seen by the Suday Nation, the Rai Group had started by placing an initial offer of $4.2 million (Sh360 million), compared to Juja’s offer of Sh1 billion.
Juja stuck to its offer throughout the process. However, in the very last stages, Rai improved its bid to Sh1.1 billion — marginally beating its opponent.
With the formal bidding process ending with Rai at the front, both the government and receivers agreed to proceed with negotiation with the Rai Group at the agreed price of Sh1.1 billion.
However, documents show that the moment Juja Paper Mills dropped out of the scene, Rai quickly revised its offer downwards to Sh900 million.
Why the government agreed to continue negotiating with Rai in the face of an offer that was clearly inferior to the offer by Juja Paper Mills is one of the most intriguing asides to this story.
Aparrently, the receivers had wanted to open new negotiations with Juja Paper Mills, arguing that their hands were tied by receivership laws to sell Panpaper only to the highest bidder.
In a letter to the Treasury dated October 15, 2014, Mr Small argues that they risked litigation if they sold the company to the Rai Group.
“We cannot be certain at this time that the offer currently being pursued is in the best interest of the secured creditors of the company,” he said, charging that the revision of the offer by the Rai Group was below the next highest offer Juja’s).
“We regret that we can no longer continue to act in this matter as we cannot discharge our duties with the level of professional conduct we would expect,” the receivers said.
If they thought their resignation threat was going to force the government to persuade them to stay on, they were dead wrong.
“Now that you have resigned, further correspondence on this issue will not be useful,” said Industrialisation Secretary Adan Mohammed.
“Any assets you hold should be surrendered to the new receivers as soon as the appointment is made,” the minister added.
With the receivers out of the way, and the government bent on going on with the deal as quickly as possible, all indications are that Panpaper is going to end up in the hands of the Rai Group.
The group also owns Mufindi Paper Mills in Iringa, Tanzania, which they purchased in 2006 under a privatisation programme.
Whether the sale will lead to the re-opening of Panpaper remains to be seen.
The option of selling the company has been on the table since May, last year.
Long before Panpaper was put on the chopping block, the receivers wrote to the government proposing the timber merchant option.
In a confidential memo to the Ministry of Industrialisation in May, last year, the receivers argued that – in their view – the best candidate for Panpaper was a large timber merchant attracted by an opportunity to harvest wood from government forests at subsidised rates.
A timber licence, they argued, would be a key attraction because any timber merchant coming forth would want to harvest wood and use it for purposes other than paper production itself.
“The purchaser may not intend to operate the Panpaper mill at full capacity,” said the receiver in the letter.
In a nutshell, the model preffered by the receivers was not a paper manufacturer per se, but a business which while maintaining some limited paper-making activity, would basically be doing timber business.
If the ultimate objective is to revive Panpaper, what is the point of selling to a timber merchant whose prime motive is to access government forests on the cheap?
Several questions arise. Does it, really, make sense to – in the name of reviving Panpaper – grant a private timber merchant a 30-year licence to harvest wood from government forest at subsidised rates?
And, what exactly does the government want to achieve by reviving Panpaper: a commercially viable entity running on a profit basis or a state-controlled entity that will play a broader developmental role in the economy of western Kenya?
These questions are pertinent because according to the original thinking by the government, the State was supposed to buy off Panpaper’s long-term lenders and transform it into a fully-fledged parastatal under the Ministry of industrialisation.
Indeed, as far back as July last year, the Attorney General and the Treasury even went to the extent of incorporating a new government-owned company by the name Webuye Paper Mills, which was to take over Panpaper’s assets from the company’s long-term lenders.
At one stage, the government set aside Sh900 million to be used to pay off the lenders. But somewhere along the way the idea of turning Panpaper into a fully-fledged parastatal was quietly dropped.
Why did the government drop the idea of outright purchase of the assets of the assets of the company?