Complaining Uganda Clays Shareholder Told to Sell Stake

Habib Sembatya, a Uganda Clays Limited minority shareholder, who recently dragged the firm to court seeking an injunction against National Social Security Fund (NSSF)’s takeover of UCL, has been aised to sell his stake.

NSSF intends to turn its Shs 19bn loan to UCL into equity. Sembatya argues that the deal, which would take NSSF’s stake in UCL to 66 per cent, would dilute his shares. Currently, NSSF owns 32.5 per cent stake of UCL.

In a response, through UCL’s lawyer, Mathias Nalyanya of Lex Uganda Aocates, UCL Managing Director George Inholo said Sembatya will have the opportunity at a general meeting to present his position and arguments for or against the proposed transaction.

“The applicant has the alternative of exiting the 1st respondent [UCL] by selling all his shares on the stock exchange if he has serious objections to the loan-to-equity transaction.”

Sembatya has 215,000 shares, valued at Shs 4.3m when multiplied by the current share price of Shs 20. UCL has 900m existing shares that are shared among its more than 2,600 shareholders. However, the value of those shares are likely to lose value if the deal with NSSF gets a thumbs-up as that will mean UCL has to create new shares in order to convert NSSF’s debt into equity.

Before Judge Lydia Mugambe at the High court Civil division this week, Sembatya’s lawyers, MS Najib Mujuzi Aocates, argued that if NSSF wants to be fair to UCL, they should offer the firm a grace period of 20 years. This, they said, would give UCL enough time to recover from its current losses.

For three years now, shareholders have not earned a dividend as UCL struggles to dig itself out of a pile of debt and losses. UCL’s results for the period between January and June 2014 show more pessimism than optimism. The firm reported a Shs 2.4bn loss, compared to the Shs 13m loss during the same period last year.

UCL promised a solid financing strategy that would see it alleviate its debt burden in the remaining half of the year. And NSSF’s deal could be its only option.

How it started

In 2010, the company obtained a shareholder loan of Shs 11.05bn from NSSF at an interest rate of 15 per cent per annum. The loan was utilized to service loans from commercial banks and accumulated arrears, and purchase of spares for the factory at Kajjansi. As at the end of last month, the loan and accrued interest [of the NSSF loan] was Shs 19.06bn.

The firm still owes money to East African Development Bank, Shs 1.22bn and Standard Chartered bank, Shs 1.87bn, according to documents presented in court.

The combined monthly loan repayment obligation for the company is Shs 563m. When you include other expenditures, the firm’s monthly total costs are Shs 2.3bn, way above its Shs 1.8bn income.

Poor investment

In 2009, UCL opened up its second plant in Kamonkoli in Budaka district. The company had hoped that the automated line at Kamonkoli would boost production, and speed up operations, compared to the manual workload at Kajjansi. However, Kamonkoli turned into a white elephant, and sucked up more money to run its operations.

UCL says it plans to turn to coffee husks as a cheaper option to run its kilns. Meanwhile, the factory at Kajjansi remains inefficient because it is very old. The firm says some of its debt woes were incurred as it tried to replace the worn-out parts at Kajjansi.

The company must also meet demand from its clients on time. Today, a bigger client who places an order has to wait for almost a month to receive their products, according to sources.

The emergence of g competitors such as Roofings, Lweza clays, and Kajjansi Brick amp Tile works Ltd, has made life tougher for UCL. For Sembatya and other unsatisfied shareholders, they await the judge’s ruling on December 12, when court will decide whether the takeover should go on.

Source : The Observer

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