Ratio Magazine :: The Inside Track to East Africa’s Economies - New Analysis: Citadel Entry Fast-Tracking the Railways?

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New Analysis: Citadel Entry Fast-Tracking the Railways?

Thursday, 01 April 2010

After several years of seemingly interminable delays and complications, the recent shake up may finally nudge things forward: After their controversial entry into the Rift Valley Railways (RVR) consortium (Ratio Blog: New Kid on the (Private Equity) Block ), Citadel Capital have come to an agreement with Trans Century, the Kenyan private equity firm and consortium investor who had been in negotiations for the Sheltham stake that Citadel acquired. The agreement between both firms will include a streamlining of the consortium membership: In a recent press release, Trans Century and Citadel have announced that they aim to buy out the remaining shareholders so that the final constellation for the consortium will only have three members: Citadel subsidiary Ambience Ventures Ltd with 51%, Trans Century with 34%, and the Ugandan investor with 15%. In particular, Citadel had stated their intent to acquire 100% of Sheltham.

Seeing an opening to divest from the venture, investment firm Centum are now offering their 10% stake in the consortium to the ‘original shareholders’ for USD4.5m – which technically excludes Citadel or its subsidiary Ambience Ventures, but will presumably still include Sheltham. Centum had already written off USD4m of its total USD6m investment in RVR.

Perspectives:

Protracted board-room battles were the last thing that the railway consortium needed –and so it is helpful that Citadel have managed to come to an agreement with Trans Century, and are also willing to follow through with financing. The meeting in which both companies settled their agreement had been moderated by a representative from the International Finance Corporation (IFC), one of the initial backers, indicating that the IFC’s long promised funding might finally be unlocked. Citadel themselves bring financial resources to the deal, all of which is encouraging.

With the railway acquisition, Citadel have made a very aggressive entry to East Africa, not just by taking on such an established and politically well connected player as Trans Century, but also by its clear intent to reduce the number of parties involved in the consortium. Retaining a Ugandan investor in the team points at the underlying dynamic, and possibly shifting momentum in governments’ involvement: For Uganda, the need to create a transport route for its impending oil production is becoming an urgent priority (Ratio Blog: Will Commodities Finally Sort out the Railways? ).

In their agreement, both companies also committed to ‘facilitat(ing) the development of the standard gauge railway that the governments are desirous of building’. The Kenyan government had recently tendered the feasibility study for the standard-gauge railway. No details have been provided on this in the press release, but if Citadel and their partners are serious about this second railway, they will need to consider how much money and effort they invest in the old narrow-gauge railway that will then become obsolete. Whether Citadel has the muscle to pull together a group of investors for the new railway remains to be seen – and the Kenyan government also appears intent to pursue the project to build a railway from Lamu through northern Kenyan to create links to Southern Sudan and Ethiopia.

The aggressive private-sector entry in the RVR contrasts with EAC neighbor Tanzania where the government, also frustrated with the slow progress in modernizing the railway, has announced that it will terminate the contract with Indian RITES and buy back the 51% of the shares. This development may also partly have been driven by Rwanda who are looking to have an alternative to the Kenya-Uganda transport route that led to supply interruptions in Kenya’s post-election violence, and who are keen to build a direct railway connection from Kigali (with an extension to Burundi’s Bujumbura) to Dar es Salaam’s seaport. This would help to lower the uncompetitive transport costs in and out of Rwanda – and would also create a transport link for mineral exports out of eastern DRC.

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