Where is this company getting its money from fellow kenyans?

This company needs a critical investigation. I personally would like to know the
source of its money and who is behind the operations.

Julius Okelo
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Transcentury changes its game face                   
Written by Geoffrey Irungu 
Mr. Gachui
08-June-2007: In the 10 years that Transcentury has been in existence, Kenya’s most prominent and possibly  most envied investment group has been called many names.

To detractors, the firm is not only seen as a corporate raider, the barbarian at the gates in the true sense of the word, but also as the reincarnation of Gordon Gekko’s culture of “greed is good”, in the movie Wall Street -- on the Nairobi Stock Exchange.

Among retail investors and the stockbroking community, a cottage industry that trades on rumours about which deal Transcentury (TCL) is chasing on listed companies is thriving.

However, to many young professional Kenyans who are now joining investment groups by the thousands, Transcentury is a real inspiration. They are dazzled by the mysterious drama of deal making in high finance.

James Gachui, Transcentury’s chairman, cannot understand why anyone would find the curiously named firm interesting. But then again, by his own admission this rumour mill and persistent reporting on the firm’s activities have made it lose a multi-million shilling acquisition deal.

Take the case of planned investments in Housing Finance and Kenya Power & Lighting (KPLC), two market events that put TCL on the market’s lips. Last year, Mr Gachui says that TCL had entered into negotiations for almost a year with CDC, the British government’s overseas development investment firm for shares held in Housing Finance. But on February 20, 2006, the negotiations were leaked to the media.

“We had done a lot of expensive work negotiating and traveling to London and we were coming close to an agreement that valued Housing Finance at its true value of Sh9 per share,” says Mr Gachui, “Then the East African published the story and investors bid the share to an all time high.” Housing Finance shares climbed to Sh65, from Sh14.

The negotiation platform changed as CDC started demanding for a higher valuation that became a deal breaker. “Nothing had changed in Housing Finance’s fundamentals to change its true value overnight,” said Mr Gachui. “It was worth Sh9 then and even now.” “What happened is that the small investors burnt their fingers by buying high and the share has been falling since. In the first place we did not think that the company was worth Sh14 a share. Even today, it isn’t worth Sh14 a share.”

Housing Finance closed at Sh30.25 yesterday on the NSE.

Besides Housing Finance, TCL’s investment in KPLC was both a merry affair, but a publicity nightmare. In March 2006, TCL snapped a block trade equivalent of 4 per cent of KPLC worth Sh340 million that had been placed in the market by the National Social Security Fund (NSSF). This deal almost became a public scandal for the Government with NSSF having sold its stake in KPLC, the Treasury held less than 50 per cent of the electricity utility.

This meant that government’s oversight over KPLC had been neutered and the firm was no longer required to abide by the State Corporation Act. Most important, KPLC would no longer have to follow the Byzantine Maze of government procurement rules that open even the most routine purchases to competitive bidding. Mr Gachui says TCL invested in KPLC shares because the company wanted to have a stake in the energy sector.

At the time, the NSE equity market was enjoying a robust bull market. Controversy over this deal helped boost KPLC shares, opening a window for TCL to sell two per cent of its holdings. The move that helped the Government retain its majority stake in KPLC was made at a time that the value of TCL’s investment had doubled in value to Sh680 million and enabled it to harvest a cool profit of Sh340 million in October 2006.

The firm’s investment in KPLC is now worth Sh332 million. Money raised from the sale of KPLC shares was used to finance the Sh630 million investment in Rift Valley Railways -- the company that won a 25-year contract to run the Mombasa - Kampala railway line.

In the last four years, TCL has had both a good time and a rough ride, however as the firm celebrates its tenth year since founding, it is now facing up to a new future.

Top among its priorities is to shed its underlying narrative of a mysterious, politically connected firms bent on taking over Kenya Inc. While government connections are crucial in business, they can also be a dizzying distraction as TCL has discovered. Mr Gachui says that the firm’s deals are usually at arms length.

“The shareholders may have friends who are politicians but they are not themselves politicians,” he said. The political image has not been helped by the fact that indeed some of its 29 members in their individual capacity and not as lobbyist of TCL are men who can literally whisper into President Kibaki’s ears. Some even serve as the president’ official advisors or head state owned companies.

This is a similar problem of money and power that the Carlyle Group, one of the world’s biggest and most prestigious private equity group that counted George Bush Sr., John Major, Henry Kissinger and many other Statesmen among its owners and advisors was facing a few years ago.

As a loose collection of 29 members, TCL vice chairman Mr Zeph Mbugua says things worked just fine when the investment group was small, but not anymore especially for a firm with investments estimated at Sh10 billion.

The turning point started in 2003, when TCL closed one of its smartest deals yet by buying 75 per cent of East African Cables, which is listed on the NSE from Naushad Merali for Sh240 million. East African Cables is today worth Sh8.3 billion, meaning the TCL stake is valued at Sh6.3 billion.

Then 2006 added the momentum of change with the Housing Finance and KPLC deals. Suddenly, the scale of the money the firm was managing and the complexity of the deals meant that TCL had reached a stage where it would have to move to the next level by separating ownership and management.

In the last few months, the firm has been putting together a professional management team led by Mr Tony Wainaina as chief executive, who previously ran ICDC Investment.

Mr Wainaina joined in November 2006 and has since lured two CFAs from rivals to TCL. This is Mr Mworia, 29, a senior investment analyst who worked for ICDC Investments and Ms Eleanor Kigen, 25, who worked in a similar capacity at African Alliance.

Mr Gachui says Transcentury is now broadening its ambitions to run more like a private equity firm. Even before it assumed such a role, it has been working more like a loosely organised private equity firm.

For instance, it has invested in several companies and partially exited from some. It has invested in other funds and as its appetite for deals is growing, it is actively borrowing money from investors.

Typically, private equity funds raise cash from rich investors on the understanding that they have a superior track record of identifying and buying companies with great potential, but are currently undervalued because of weak management, good products. After turning around such companies, they are sold back on the stock exchange or trade buyers after a limited time of 10 years.

After selling the companies, the original cash and the returns are given back to investors. TCL now wants to become a fund-of-funds, which means playing in a much bigger league. Already, it has a good track record with East African Cables. Last year, the company pushed forward its regional expansion agenda when East African Cables bought a 51 per cent stake in Tanzania’s Daesung Cable for $2.62 million from its Korean owners.

Basically, the firm wants to raise as much cash as is needed to play the role of a big investor. In the next few months, Mr Gachui says that the firm will be embarking on an aggressive fundraising mission for several funds it wants to launch.

He says that while the amount to be raised has not been decided on, the actual amount will be informed by the expected deals. TCL badly needs this because its current portfolio is overweight on the energy sector and especially manufacturing components industry. RVR boosted its exposure to big public infrastructure.

Though energy and infrastructure plays are expected to be huge in the coming years as Africa grows, the firm needs exposure to other sectors to minimize risk. It is now hunting deals in sectors related to manufacturing, trading, energy, tourism and financial services.

Despite the attention that the firm gets, Mr Gachui says that it is never easy to raise funds for deals. To buy the stake at KPLC required the company to raise funds and the challenge was, to find an institution that was willing to lend money to TCL at short notice. A bank, which he would not disclose, financed part of the share transaction as the rest was received from its own members.

Trans Century’s most recent deal was with Business Partners International Kenya SME fund (BPI-K) which it acquired a 10 per cent stake valued at Sh105 million ($1.5 million).

BPI is a specialist venture fund has been created to provide financial services to small and mid-sized firms in Kenya investing between $50,000 and $500,000 per company.

The $15 million fund is co-sponsored by the European Investment Bank and the International Finance Corporation (IFC) who will contribute $5 million each, and Business Partners Limited, a South African firm experienced in SME development organization.

With a successful private placement, it could even increase its stake at BPI if the opportunity were available. If the company raises funds from international institutional investors such as the World Bank’s International Finance Corporation (IFC) with the offer or others of the same repute, it will not only boost its capital base at the lowest cost possible cost but also cushion itself from future political risk.

Indeed, financial market players says the private placement it is planning is likely to be oversubscribed even if it were offered only to local institutions given the profile of the firm. This is so because the financial markets are already flush with cash.

The convenience of the private placement is that it does not involve going through the Capital Markets Authority to seek approval as long as the shareholding is below 50, at which membership it will be considered a public company.

All a company might do is notify CMA, which is in any case optional. TCL has therefore an opportunity to increase the number to 49 without attracting the attention of the CMA.

When the company was formed in 1997 the intention was to raise membership to 50 but this was not possible at the time.