How ARM heir’s plan to hive off Sh1.6bn unit failed

Athi River Mining #ticker:ARM chief executive and major shareholder Pradeep Paunrana’s plan to hive off a Sh1.6 billion portion of his collapsed cement business empire fell through after administrators rejected the plan, it has emerged.

ARM’s administrators PricewaterhouseCoopers (PwC) cancelled the intended sale of the group’s fertiliser blending unit to Swiss firm Omya and Pinner Heights Limited (PHL), which Mr Paunrana was using to secure the purchase.

The administrators argued that sale of the fertiliser unit would deny the buyer of the collapsed cement factory access to limestone deposits in Kitui County, a key ingredient in the processing of cement.

“The opinion of a cement industry expert advised that the agreements were unclear, unfinished and strategically damaging to Kitui limestone deposits for a cement strategic buyer,” said Muniu Thoithi, one of the two administrators of the collapsed business, in an affidavit filed in court.

The court filings are in response to a case filed by Mr Paunrana opposing the intended sale of ARM Cement to Kenyan rival, National Cement.

Mr Paunrana, who has won a temporary order stopping the sale, is the son of the elder Harjivandas Paunrana, the patriarch who founded ARM Cement that grew to become a Nairobi Securities Exchange (NSE) listed company.

ARM’s financial statements for 2017 disclosed that it had entered into an agreement to sell the fertiliser unit’s assets for Sh1.6 billion to Omya and Pinner Heights Limited (PHL), a company partly owned by Mr Paunrana.

ARM would sell its fertiliser and mineral production businesses in Kenya to Omya, which would have the exclusive say on supply of industrial mineral products.

Potential buyers who put in bids for the ARM Cement business were, however, not comfortable with the Omya transaction, prompting the administrators to stop it as it was not yet concluded.

“On this basis, after due consideration the administrators put the Omya sale on hold in order to maximise the realisation from the transaction process. Omya was advised of this development at a meeting held at PwC offices on November 30, 2018,” says Mr Thoithi.

In March this year, the Swiss firm revised its offer for the fertiliser unit from Sh1.6 billion to Sh400 million, which put it at a disadvantage against National Cement which had put in a Sh5 billion offer for the entire business operations in Kenya.

At this time Mr Paunrana, who was serving as general manager at the troubled cement firm, told the administrators that he wanted an opportunity to put in a bid of his own. According to Mr Thoithi, the administrators agreed on condition that the offer would be made by April 5, 2019 and proof of funding provided. Mr Paunrana failed to meet the condition ‘‘without any form of communication or request for extension.’’ On May 17, Mr Paunrana submitted a bid through a consortium with Jaswant Rai Group seeking to buy the business for Sh6.5 billion. In court fillings, Mr Paunrana claims that this bid was summarily rejected after a cursory review without seeking feedback and on the basis that an agreement had already been signed with another party.

In his reply, Mr Thoithi claims the offer was submitted just one hour before signing of the deal with Nairobi Cement, but was still reviewed despite the late submission.

He says the bid, however, lacked proof of funding as it had only an expression of interest from Baraka fund offering to finance the bid, and that it was not binding since the financier still needed to do due diligence and negotiation of transaction documents, a process that had been concluded between October 2018 and March 2019.

Further, he claimed that Mr Paunrana had indicated earlier that his family did not have money to participate in the transaction and that Rai Group had considered the transaction but decided not to bid.

On May 7, Ms Navishka Paunrana had also said that the family would put in a joint bid with Dangote Cement but this was not submitted. Dangote Cement later confirmed that they would not proceed with the transaction with the Paunrana family.

As such Mr Thoithi says that based on these inconclusive bids, it was not prudent to terminate the deal with Nairobi Cement.

While the fight over ARM assets drags in court, the administrators warn that the company will pile up more losses and may lose its Tanzania subsidiary, Maweni Limited, which is in danger of being attached by creditors.

The administrators say the cement maker risks stopping its operations if it fails to renew its licence and that the 12-months administration period is about to expire.

The administrators also fear that Nairobi Cement may walk out of the deal given the uncertainties and deterioration of the plant, which the investors claim has not undergone maintenance for years and would require up to Sh2.5 billion to optimise.