Inside Umeme shares deal

By Haggai Matsiko

Energy sector attracts big money, investor makes Shs 200 billion

Despite leading to a 5.5% drop in share value, Actis Capital LLP’s sale of 45.1% of its 60.08% stake in Uganda’s sole national power distributor, Umeme Ltd, appears to have gone fairly smoothly.

The shares sold at Shs.340 which is Shs20 less than what they had been trading at before Actis voluntarily suspended trading to avoid speculative price volatility as it closed the block deal with the institutional investors. The deal, which was worth US$86 million (Approx. Shs 215 billion) according to Actis, has, however, given Ugandans a taste of the uncertainty involved in trading a strategic asset on a securities exchange.

The transaction is the largest secondary block trade to date on the Uganda Securities Exchange (USE).  Actis first partially shed off its stake in Umeme in 2012, retaining 60.85 when it listed on the USE and NSE.

Innocent Dankaine, the Acting Chief Executive, USE, described the progress of the deal as “exceptional”.

Patrick Mweheire, the Executive Director of Stanbic Bank, which was the lead advisor in the transaction , said that 20 new and existing blue-chip institutional investors bought shares in the cross-listed company worth Shs 199 billion on the USE and Shs15 billion on the Kenyan bourse.

By press time, the outcome of Actis’s additional trading in shares to local retail investors and to Umeme’s directors and management team had not been finalised. Retailers were expected to get Shs12 billion worth of shares and the Umeme management and directors shares worth Shs16 billion. This would determine the stake that Actis will retain for at least two years, according an agreement with the Ugandan government.

By May.19, the Actis subsidiary, Umeme Holdings, was still the major shareholder with a 21% stake. But this is expected to be whittled down to about 15%.

At this point, Investec, which is touted as Africa’s biggest fund holder, was expected to become Umeme’s biggest shareholder, with 18% shareholding.

Umeme Holdings would come in second with 15%, followed by Uganda’s pension fund manager, the National Social Security Fund (NSSF) with 14%.

Kabagambe Kalisa, the Permanent Secretary in the Ministry of Energy and Mineral Development which oversees Umeme sounded satisfied with the transaction.

“By divesting the Umeme shares to such credible investors, Actis is further enhancing the energy sector,” he is quoted to have said in the statement issued by Actis.

David Grylls, Partner at Actis is quoted to have said the transaction deepens the capital pool into Uganda and broadens the institutional shareholders of Umeme, to continue the next phase of growth.

“That growth is indicative of Uganda’s powerful macroeconomic story,” he is quoted to have said.

Actis mega profits

Interest in Umeme shares is partly attributable to its financial performance and dividends policy. In Umeme’s profits after tax increased to 84 billion in 2013 compared to 54 billion in 2012. Umeme shareholders got Shs15 per share in dividends in 2013 and are set to get Shs16.8 per share this year.

Umeme Holdings Ltd, which holds Actis shares, and its nominees who controlled 975,553,503 shares walked away with about US$6 million dividends last year and US$6.6 million this year. These dividends coupled with this year’s US$86 million, make Umeme shares even more attractive.

The Umeme board chairman, Patrick Bitature, says the sale increases the possibility of access to cheap credit for the distributor to expand.

“Our major shareholder (Actis) was 5 billion dollar fund,” Bitature said, “now we have opened that purse, we have diversified it, we have got strong institutional shareholders who are worth a trillion dollars.”

He said Investec manages over US$200 billion, which is more than 40 times more what Actis manages and explained that with these ‘deep pocket’ investors, Umeme will have access to funds it needs to expand its distribution capacity especially with three power dams set to be constructed in a few years.

Karuma, Ayago, and Isimba hydro-power dams which the government plans to roll-out have a potential to generate 1383MW. This would bring Uganda’s generation capacity to 2201 MW.

“Who is going to distribute it?” Bitature asks, “We need to invest much more than we have lined up right now.”

As part of its midterm expansion strategy, Umeme has lined up US$440 million in investment money. But going forward, Bitature says, the company will probably need a billion dollars for the next leg of expansion.

“Everything is driven by money,” says Bitature, “You can borrow money at a cheaper rate when you have got strong partners.

“All these will come to benefit our customer because our tariff will go down, our roll out will be more aggressive, we will have better customer service.”

Umeme Managing Director, Charles Chapman, says the plan is to build the distribution network before the generation comes upstream.

“The opportunity that we see is really looking at building the network pre-Karuma,” Chapman said, “we are well positioned to raise long term funds.”

Chapman says this is an opportunity for more Ugandans to get “The real exciting thing for Umeme, when generation comes in, is that we are going to start connecting people,” he added.

Uganda’s electricity penetration remains a paltry 14%. Of these, Umeme, the sole distributor supplies over 574,000 clients in a population of 35 million people.

Questions asked

But the Actis sale, which has been thin on transparency, coming a year after another controversial sale, has raised questions about the future of the electricity distribution sector of Uganda and the speculative nature of share trading.

A particular red flag appeared to be that the sale comes at a time when some members of parliament have recommended that Umeme’s 20-year power distribution concession be cancelled.

In the same week as the Actis share sale was being finalised, the Rules, Discipline and Privileges committee of parliament started investigations into claims that Umeme had bribed some MPs to block an Adhoc Committee report into its operations. The allegations first surfaced in December 2013 and refuse to go away. Speaker of parliament Rebbecca Kadaga instituted the committee to investigate the entire electricity sector in 2011.

On March 27 parliament voted to recommend that the government cancels Umeme’s contract because it had failed to improve the efficiency of the distribution network and cut energy losses. The MPs also were unhappy that the contract appears to disadvantage Uganda.

As the major national power distributor, Umeme’s concession mandates it to operate, maintain, upgrade and expand the distribution network.

So far, the government has shown no likelihood that it will act on the MPs demands. Instead, Energy Minister Irene Muloni warned cabinet last year that the Umeme concession should not be terminated.

She warned: “If the sector is placed into the hands of speculators, it will inevitably collapse and the entire economy may collapse with it”.

But West Budama MP, Jacob Oboth-Oboth, who chaired the Parliamentary Adhoc Committee that recommended cancellation of the Umeme contract, says they are still pursuing the matter.

“What Umeme is doing is not only to spread the risk but also win sympathisers such that when you raise issues everyone will be out to defend it,” he told The Independent.

“We know that Umeme has performed well, has posted profits, and is borrowing massively to expand the network,” he added, “our concern was the contract, was not unfavourable.”

Under the contract, in case government cancels it, Umeme gets 120% of its investment in compensation. In case, Umeme pulls out, government compensates it 80% and in case of natural termination, Umeme gets 100% of its investment in compensation. In all cases, the distribution network reverts to the government.

By attracting more investments, observers say, Umeme is tying the hands of the government even further and naturally extending its concession beyond the 20 years, which ends in 2025. By then, it will be even much more costly to compensate Umeme.

Capital gains tax

Another expectation from this transaction is the touchy issue of Capital Gains Tax (CGT), a very combustible issue with the governments still dealing with several cases with oil companies over the matter.

A source at Uganda Revenue Authority (URA) told The Independent that the transaction attracts CGT but that the sum could not be easily revealed.

“It [sum] is generated to the taxpayer in an assessment,” the source said, “until then, it is premature.”

When asked whether Umeme Holdings would pay CGT or not, Sarah Banage, the Assistant Commissioner – Public & Corporate Affairs at URA was non-committal.

She said:  “I don’t know. The law is very clear that we do not disclose that information. That information only becomes public when there is a dispute.”

A source at the Uganda Securities Exchange (USE), however, said that such transactions had not started attracting CGT.

“We (USE) are still growing,” the source said, “one of the incentives to attract more participants is that they do not have to pay CGT.”

Innocent Dankaine, the Acting Chief Executive, USE, did not respond to requests for additional information on the matter.

Allegations of secrecy

Henry Rugamba, the Head of Communications, Umeme, laughed off the MPs attempts to cancel the Umeme contract.

“The recommendations by parliament have no bearing on the decisions of our investors,” Rugamba told The Independent, “Technically; it is a game over for them (parliamentarians). They made recommendations and submitted them to the executive.”

Apart from the parliament issue, Actis was also not spared allegations of secrecy.

Critics say that Umeme did not disclose two years ago—when it issued its IPO—that it had plans to offload another round of shares.

Rugamba says that disclosing was not necessary.

“…with this latest sale, Actis was responding to overwhelming demand seen in the IPO, which was oversubscribed by 37 percent. That is why disclosure wasn’t necessary. It would have been different if this was a first sale,” he said.

Insiders well versed with Actis modus operandi of identifying a business, injecting in capital and good management practices to attract multinationals, and making a kill in an equity sale, were surprised by its recent move.

Actis came to own Umeme through the Commonwealth Development Corporation (CDC) of the UK. When the Uganda government unbundle Uganda Electricity Board (UEB) into three separate entities to manage electricity generation, transmission and distribution, CDC invested into the venture and brought in South African energy operator, Eskom. When CDC migrated from direct investments to venture funding, its managers formed Actis to continue with the equity investment arm.