The Rise and Fall of ARM Cement 

ARM Cement Limited, formerly Athi River Mining Limited, was one of East and Central Africa’s largest cement producers boasting operations in Kenya, Tanzania, Rwanda and South Africa. ARM also owned the largest clinker plant in the region at the height of its existence, enabling the company to sell and export clinker to other countries in …

ARM Cement Limited, formerly Athi River Mining Limited, was one of East and Central Africa’s largest cement producers boasting operations in Kenya, Tanzania, Rwanda and South Africa. ARM also owned the largest clinker plant in the region at the height of its existence, enabling the company to sell and export clinker to other countries in the region. ARM went head-to-head with some of the largest cement manufacturers in Africa, including Dangote Cement, and proudly held its ground in the region’s competitive landscape.

So, what happened to ARM? The fall of ARM is a classic case of flying too close to the sun, an analogy that originated from the Greek mythology of the young man Icarus who flew too close to the sun despite being warned by his father and ended up melting his wax wings and drowning into the sea. In this blog, we will take a look at the company’s impressive rise to the top and where it possibly went wrong for the cement company. This piece will dive into ARM’s story using publicly available information and follow the chronology of events as provided in the company’s annual reports, financial statements, interviews with executives in the local media and news pieces.

ARM recorded significant growth from its Initial Public Offer (IPO) in 1997, with its revenue growing at a 10-year Compounded Annual Growth Rate (CAGR) of 21% from 2005 to 2015. Cement production also recorded significant growth, growing to 2.6 mn Tonnes Per Annum (TPA) in 2014, from 60,000 TPA in 1996, an 18-year CAGR of 23%. The significant growth in revenue and cement production points to the substantial investment made by the company over the years as it aimed to be the largest cement manufacturer in East and Central Africa.

Where it All Began

In 2008, ARM broke ground on a 1.5 mn TPA cement plant in Tanga, Tanzania, intending to significantly increase the company’s presence in East Africa and with the expectation that the plant, along with the operations in Kenya, would double the company’s turnover and profitability. ARM acquired a USD 1.0 mn long term loan to finance the plant in 2008, which was secured against the plant. The Tanga cement plant was owned by Maweni Limestone Ltd, a 100% owned subsidiary of ARM Kenya.

Before the completion of the Tanga Cement, ARM had managed to double its turnover and profit by 2012, with its revenue increasing to Kshs 11.2 bn in 2012, from Kshs 4.6 bn in 2008, while Profit Before Tax (PBT) increased to Kshs 1.8 bn in 2012, from Kshs 0.7 bn in 2008. This growth instilled confidence in the management and spurred further investment in Tanzania.

The Tanga cement plant however experienced delays, and the plant was officially opened in 2014, compared to expectations that the plant would be up and running by 2012. By the time the plant was opened in 2014, ARM’s Debt to Assets had increased to 0.74x from 0.67x in 2008, while the Debt to Equity rose to 2.9x, from 2.0x in 2008.

Source: ARM Financials

The graph below shows the debt to assets trend from 2007 – 2017;

Source: ARM Financials

While financing is necessary for growth, the increasing debt burden did not lead to increased profitability for ARM. The group’s Return on Assets (ROA) declined to 4% in 2014, from 8% in 2008, while Return on Equity (ROE) decreased to 16%, from 24% in 2008.

Source: ARM Financials

ARM relied highly on short term debt financing in 2009, pending completion of the long-term project financing planned for early 2010. In October 2009, the company entered into an agreement to purchase mining rights for future raw materials sourcing in South Africa. These rights accrue to the company through acquisition of a controlling interest in Mafeking Cement (Pty) Limited.

A Kshs 1.6 bn equity-linked note was secured in 2010 to commence construction of cement plants in Tanzania. 2010 was also the second year in a row when Cost of Sales was growing at a faster rate than revenue, a trend that would persist until 2013. Related party transactions were also slowly but surely becoming a significant issue for ARM. (Kshs 2.1 bn was due from Maweni Limestone Limited, ARM’s subsidiary, an amount which would later shoot to Kshs 21.6 bn by 2017).

ARM received a convertible instrument in the form of a Kshs 4.3 bn injection from Africa Finance Corporation (AFC) in 2011. Despite the significant amount raised from AFC, which would have been sufficient to cover the construction of the clinker plant (estimated at Kshs 3.3 bn by management), ARM took up more debt in the following years and ended up accumulating more short-term debt as opposed to long-term financing. Of the Kshs 4.3 bn raised from AFC, Kshs 2.3 bn was held in short term deposits to support the company’s working capital, which had turned negative in 2011. This led to 2012 being the only year since 2011 when the company recorded a positive working capital.

ARM’s main challenges began in 2014, the same year the clinker plant in Tanga, Tanzania, was commissioned. Competition in the Tanzanian market was heating up, and the company found itself in a price war amid a battle for market share in the country. Tanzania’s GDP and cement consumption had been growing  faster  than in Kenya, consequently attracting new players into the market. This also included imports from China and Pakistan. The company mandated a group of lead arrangers (Barclays Bank of Kenya, CFC Stanbic Bank and Standard Chartered Bank) to assist the Company in raising its medium to long term funding requirements and to refinance its short-term borrowing in 2014, the first sign of working capital distress. By this time, short term borrowings were 73% more than long term borrowings, with the Kshs 1.6 bn Equity linked note secured in 2010 maturing in 2015 and the Kshs 1.8 bn Aureos Income note also maturing in 2015. ARM was under pressure to refinance the short-term debt as well as settle Kshs 3.4 bn within a short period of time and amid a liquidity crunch.

While 2015 was meant to be the year ARM benefited from the increased capacity of the Tanga clinker plant, power outages in Tanzania impacted the plant’s ability to produce at optimum capacity, leading to lost revenue for the company. Back in Kenya, competitive pricing had also caught up, and cement prices were weakening, leading to lower margins.

Management decided that equity was the best option to reduce the impact of the mounting debt, which was aggravated by foreign exchange losses when servicing dollar-denominated loans. During FY’2015, finance costs and foreign exchange losses totalled Kshs 6.0 bn, which was more than the Kshs 4.3 bn Gross Profit recorded that year. This led to ARM recording its first loss during the period under review of Kshs 2.9 bn. ARM, therefore, engaged CDC (now BII) in 2015 to rationalise the debt-to-equity structure and reached an arrangement for CDC to invest USD 140 mn for 40.66% shares in the company. The investment was aimed at strengthening the company’s balance sheet, reduce the interest burden and generate free cash flow. However, during the year, ARM also raised a commercial paper amounting to Kshs 840 mn.

In 2016, ARM’s auditors raised concerns about the company’s ability to operate as a going concern due to its negative working capital position. ARM’s working capital had been deteriorating since 2013 to a negative position of Kshs 13.5 bn in 2017. CDC’s investment assisted in reducing the deficit and repaying the outstanding debt, but ARM’s negative capital position persisted. The graph below highlights the firm’s Current Ratio:

Source: ARM Financials

In 2017, the firm’s financial distress continued, with the Loss After Tax growing to Kshs 6.5 bn, from a loss of Kshs 2.8 bn in 2016. The management attributed the loss to the tough market conditions following the 2017 elections in Kenya, the import ban for coal in Tanzania, and the group’s deteriorating working capital. ARM’s current liabilities during the period were Kshs 17.2 bn, with the current assets at Kshs 3.7 bn. To improve  their capital position, the management proposed to sell their Non-Cement Business, i.e. Mavuno Fertilisers Limited to Omya (Schweiz) AG and Pinner Heights Kenya Limited (PHL), through a circular to shareholders dated 22nd December 2017. The sale was also expected to improve the firm’s debt position by approximately Kshs 1.7 bn. However, in September 2018, Omya and PHL cancelled the acquisition.

In August 2018, following ARM’s default of approximately Kshs 500 mn overdraft facility from United Bank of Africa (UBA), ARM was put under administration, with Mr Muniu Thoiti and Mr George Weru being appointed as joint administrations. The administration process led to the suspension of trading of ARM’s shares in the Nairobi Securities Exchange (NSE) for 6 months. In 23rd February 2019, NSE extended the suspension of trading of the shares on the bourse for a further 6 months. The graph below highlights ARM’s share price movements;

Source: Wallstreet Journal

In Q4’2019, the administrators successfully sold all ARM cement and non-cement assets to National Cement at a price of Kshs 5.6 bn. The Kenya Revenue Authority (KRA) however froze Kshs 4.3 mn of the proceeds as tax claims. In 2020, ARM completed the sale of all its shares in Maweni Limestone to Huaxin Cement for USD 116 mn, however, the Tanzania Revenue Authority imposed a USD 22 mn Capital Gain Tax. Therefore, the sale of these assets was not enough to pay off the Kshs 32.1 bn ARM owed its creditors.

ARM remained under administration for more than two years, and in 2021, following the completion of the sale of ARM’s assets, the liquidation process began. According to an article by Business Daily, ARM’s creditors lost approximately Kshs 11.5 bn during the liquidation process, with Sayani Investments, an unsecured creditor, taking a 93.8% haircut of the amount claimed. BII, who held approximately 42% shares in the company, are also among the biggest losers in the firm.

The fall of ARM follows the collapse of other giant firms, such as Nakumatt, which collapsed in 2017. The retailer’s collapse was mainly due to an unsustainable expansion strategy into Uganda and Rwanda, with Nakumatt struggling to meet its short-term obligations. The retailer collapsed with approximately Kshs 30 bn in debt.

Key Takeaways:

  1. Expansion into new markets is good. However, it should be backed by a strong business case which addresses the inherent risks,
  2. Financial discipline is key to the long-term sustainability of a business,
  3. Leverage can cause distress to a business if not closely monitored, and,
  4. Financial modelling can help a business avoid distress by:

a)  Determining the right funding need,

b)  Establishing the optimal capital structure and,

c)  Testing different scenarios

Written by; Robert Karuiyi, Ann Wacera and Steve Ogada

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