Lessons for State in Equity’s expansion

We must all applaud the Equity Group for the way it is executing its continental expansion strategy.

Just the other day, James Mwangi, the CEO, announced that the company had entered into a preliminary agreement to buy out banking units in Zambia, Mozambique, Tanzania and Rwanda that are owned by the London Stock Exchange-listed Atlas Mara Ltd (Atma).

Mr Mwangi disclosed that Atma will be allotted a 6.27 percent stake, or 252,482,300 shares in a share swap whose value has been put at Sh10.7 billion. This is a major development in our financial sector.

The fact that the transaction is being consummated through a share swap, which means that the currency in this very large transaction will be shares of Equity Bank is also significant.

Indeed, the poignant lesson coming through this Equity transaction is that listing a company, having a solid market capitalisation base, and practising good corporate governance can take you places when it comes to mergers and acquisitions.

That if you are listed on the bourse, your shares immediately become a currency that you can use for acquiring other companies.

The trend is that no company will try major acquisitions with cash.

When you look at the way Equity has executed this transaction closely, you see how acquisitions through share swaps easily deliver speed and scale.

In the current case, we have seen how Equity is grabbing four banks across the borders at one go in a single transaction.

The case for an entity like Equity to expand footprint on the continent cannot be gainsaid.

Indeed, the way Equity Group is executing its pan-African strategy mirrors what large multinationals and global players: retain sufficient scale in your home base, make sure you have a footprint in the region and seek to become sufficiently diversified at the level of the continent.

No matter how large your operation in your home base is, you must diversify and expand across territories, just in case your home market falls into trouble or when a populist leader insists on anti-business laws and regulations.

We all know how the banking sector in Kenya was forced to change business models when the government introduced interest rate caps.

What is my point? It is that ultimately, going continental will make commercial and financial sense to the shareholders of Equity.

If there is another poignant lesson to be learnt by the government from this transaction by the Equity Group, it is that shares the government owns in large commercial corporations can also be unlocked and used as currency to be deployed in investment projects.

The government is literally sitting on a nest egg. Shares in entities such as Kenya Ports Authority, Kenya Pipeline, Kenya Airports Authority and the value of shares in profitable companies such as Safaricom and KCB earn the government little.

The government should consider corporatising these big parastatals and taking them to the market for listing.

By doing so, the government will be recycling taxpayer investments from one generation to another and unlocking money it can deploy in infrastructure projects.

We are sitting on billions of shillings that can be recycled and deployed in the extension of the SGR to Kisumu free of debt from the Chinese.

Today, the recycling of State-owned shares in parastatals has become the largest source of infrastructure financing in advanced markets like Australia and Canada.

Back to the Equity transaction.

Besides Kenya, Equity already operates in Uganda, Tanzania, Rwanda, South Sudan and DRC.

It remains to be seen how the strategies the group will deploy in the new territories will look like.

However, reporting to regulatory authorities in multiple jurisdictions is a challenge.