A merger between Nakumatt and Tuskys is reportedly in the works. Merger or no merger, Nakumatt’s future still seems very uncertain.
Reports have surfaced about a merger deal between Nakumatt and fellow supermarket Tuskys. The deal follows and tries to address Nakumatt’s longstanding debt problems that have led to empty shelves across many of its outlets – including in flagship locations – and to the closure of several of its stores not only in Kenya but also in neighboring Uganda and Tanzania.
1. Nakumatt and Tuskys merge
In a scenario where Tuskys and Nakumatt indeed manage to reach a merger agreement, multiple questions can be raised, the two most important two of being: why and how?
From what has been reported in the press, a merger between Nakumatt and Tuskys would involve Nakumatt starting to deal with suppliers under Tuskys name, while simultaneously maintaining its stores and the Nakumatt brand.
It is hard to understand how a merger with Tuskys would effectively address Nakumatt’s debt pains. Not unlike Nakumatt, Tuskys has been facing its own debt problems for the past year, at least. These problems have led to the closure of multiples stores in Kenya and the downsizing of the retailer’s operation. On top of these, a very public family feud has deepened Tuskys’ troubles. Most recently, it had to replace all of its senior management.
A look at data released by the Kenyan Association of Manufacturers shows how Tuskys is not under very different circumstances than those of Nakumatt. By the end of last year, Nakumatt’s debt to suppliers represented 34% of the entire sector’s debt. Second in the list came Tuskys, with debt amounting to 31% of the total, as seen below. Although virtually all Kenyan retailers were and are still struggling, Nakumatt and Tuskys were the clear standouts in terms of debt problems.
These circumstances beg some questions regarding the feasibility but mostly the efficacy of such a deal. Nakumatt’s problems have mainly been due to poor management decisions that have seen the retailer aggressively expand on the back of growing debt and in the hopes that new stores would scare away potential rivals and pay-off in the short-medium term. Although Nakumatt’s downward spiral – not least in the public’s view – in the last few months must’ve certainly made it impossible to get stocks from suppliers, we cannot imagine Tuskys trading conditions could be much better, given the comparable size of its debt. A merger with Chandarana could do that, even with Naivas. On the contrary, a merged Tuskys-Nakumatt would be accountable for 62% of the Kenyan retail debt.
Even having that possibility as a given, it will be very hard for Nakumatt to properly seize the opportunity. A merge deal would expect Nakumatt to trade itself out of debt with stocks back in stores. However, with everything else equal, cash flow problems would likely remain. Nakumatt will have to keep on downsizing its store network in order to balance its accounts, especially because nothing has been mentioned regarding Tuskys assuming any bit of Nakumatt’s debt to suppliers and landlords.
It is also unclear what exactly Tuskys gets for the bargain. Even if Tuskys gains some equity of the Shah family business, it seems to be getting into risky business. If Nakumatt’s debt keeps on growing and late payments continue, it’s Tuskys’ name on the line with suppliers. With other domestic and international retailers already bidding to take over former Nakumatt stores, tougher trading conditions for Tuskys could mean bleaker circumstances to withstand increasing pressure of competition.
2. No merger deal is reached
Nakumatt and Tuskys have just released a joint statement saying that the media reports, although drawing on correct information regarding negotiations between the two family-owned retailers, have failed to understand that no deal has yet been reached. This statement is quite odd seeing that the media didn’t report on unofficial accounts but rather on statements given by Nakumatt’s managing director himself, Atul Shah.
However, it strikes a familiar tone with Nakumatt in recent months. From multiple statements by company representatives suggesting a deal with a supposed investor was almost finalized to the hints that the Kenyan government was ready to proceed with a bailout, several solutions seem to have been on the works without any actually having materialized. Notwithstanding, they have successfully, albeit temporarily, enabled the retailer to remain overboard and to have (some) suppliers still filling its shelves. The public talk about a merger yet to be agreed could be seeking the same results, especially given the urgency of the situation.
Without a merger deal and a few more months with empty shelves and outlet closures, it is hard to foresee a future for Nakumatt as it stands. In this case, the three different options we outlined for the retailer remain the most possible.
Recent reports that the deal was not yet submitted to the Kenyan Competition Authority’s examination give some credit to a scenario where no deal is really in the making. However, a novelty of the current situation is the fact that Tuskys has confirmed the talks about a merger deal, although clearly contradicting Mr. Shah and probably gaining leverage in the negotiations.
What then?
By virtue of Nakumatt’s current position, just news of the negotiations of a merger deal would potentially – even if only temporarily – alleviate the pressure over the retailer. The actual materialization of such a deal could buy the retailer even more time. However, if Nakumatt wants to maintain its business as it is, the same structural changes would have to be made. And a cash injection is necessary all the same.
