Fate of ARM Cement in limbo as battle returns to court

A company in receivership is like a sick patient who needs to go under the knife urgently lest his chances of survival diminish.

And as cement-maker Athi River Mining (ARM) #ticker:ARM case heads to court Monday, the firm will have been under 13 months of management and counting as warring parties seem bent on keeping its fate in limbo.

According to a report by Apex Capital on the state of cement in Kenya, ARM and East Africa Portland Cement #ticker:PORT are no longer churning out notable quantities of the building material.
The decline in production is mainly attributed to operation challenges.

“ARM Cement and East African Portland Cement Company, are currently experiencing some problems that have led to ceasing of production,” Apex Capital said.

The court battle between Jaswant Rai of Rai Cement and his business rival, Narendra Raval of National Cement, has stalled the sale of ARM Cement past the expiry of receivership, having been placed in administration on August 17, 2018. The uncertainty has made Stanbic Bank to threaten to freeze salaries for the company’s 1,000 workers.

Both parties agree that at the current state, the cement maker is sinking further into the ground.

An affidavit filed in court by former ARM owner, Pradeep Paunrana, who had been retained by the receivers as the general manager, claims that the administrators, PricewaterhouseCoopers (PwC), have run down the plant and allowed key talent to leave.

“Poor planning, slow decision making and failure to engage with management requests as well as what I believe is understanding of critical items and operations for a cement plant, have caused preventable loss and damage to ARM,” Paunrana says in the affidavit.

PwC, on their part, reckon that while the fight over ARM assets drags in court, the company will choke up more losses and may lose its Tanzania subsidiary, Maweni Limited, which is being sought to be attached by creditors.

The cement-maker risks stopping its operation if it fails to renew its licence, and given the significant fixed costs incurred each month, it will accumulate more losses and higher financing costs as well as deterioration of the plant, which investors claim has not undergone maintenance for years and would require up to Sh2.5 billion to optimise it.

The administrators also fear that National Cement may walk out of the deal, given the uncertainties which may come at a cost of breaking contract.

Paunrana accuses PwC of burning through cash advanced to keep the business, paying themselves Sh134 million ($1.34 million) and Sh184 million ($1.84 million) to consultants advising on the sale of the cement maker.

PwC, however, says it has deployed more than 20 professionals on a mostly full-time basis at the cement manufacturer’s various sites and locations.

According to Pradeep, the secured creditors have extended Sh448 million ($4.48 million) for the company and its subsidiaries which have gone to settle management fees rather than company operations.

“The administrators have paid themselves and the consultants an aggregate sum equivalent to over 70 per cent of the sum that they claim has been funded by secured creditors,” he says.

Pradeep said consumables and spares have taken up Sh154 million ($1.54 million) while employee-related costs are currently at Sh464 million ($4.64 million) for its 1,000 workers.

The parties are trying to make a case on the urgency to close the ARM deal, with creditors stating that they may no longer be willing to fund the operations of the company while its future is straddled with uncertainty.

“The court mandated administration period was a year and, accordingly, the funding was committed for this period, which lapsed in August 2019,” Stanbic said.

ARM was placed under a 12-month receivership on August 17, 2018.

PwC filed a notice of motion on August 7, which helped them secure an order extending the administration period until their application is heard and determined.

The Capital Markets Authority, through lawyer Timothy Githendu, filed an advisory that cleared PwC and National Cement of any underhand dealings and dismissed several accusations made by Paunrana and asked the court to make a guarantee as proof of funding a precondition to proceeding to hearing.

“We are of the opinion that this matter should end as quickly as possible so that the state of the company does not depreciate,” Mr Githendu said.

Last week, PwC rejected the Sh1.3 billion guarantee, opening up new battle ground for an even longer fight over the Athi River Mining assets.

The guarantee was turned down because it expired in nine months, exposing the administrators if the court process dragged longer.

The administrators were also concerned that the guarantee was not provided to cover costs and damages if the consortium lost the case.

“The guarantee is not issued by Paunrana but by an entity referred to as the consortium, which include Jaswant Rai Group of Companies. Our client has well founded concerns that inclusion of third parties who are not in court affects the quality and validity of the guarantees,” the rejection letter by Walter Kontos read.

O & M lawyers for the Rai Consortium wrote back to the administrators stating that the tycoon has been part of the case and that the orders had not specified that Pradeep would be the one to put in the money.

They said the nine-month period was the same term given to their rival bidders and that matters to do with costs were not part of the ruling and are being included in bad faith.

“We have firm instructions to move to court to protect our client’s interest against your client’s unreasonable and irregular obstructions of the court order,” O & M law said.

The matter was to be heard on Wednesday but the legal counsel said the applications had been filed late, moving the ruling to Monday 12pm.

The guarantee was a precondition to stop the sale of ARM until September 19, when a case is to be heard, but lack of it means the stay is vacated and ARM could be sold to Devki’s National Cement for Sh5 billion.

Receivership in Kenya tends to come too late in the game. At an early enough stage, there would be enough time, and transparency, to achieve a turnaround. But by the time local companies file, it is out of desperation, or because the dominant shareholder wants a cover for a final attempt to grab assets.