What does the UGX700 billion buyout mean for Umeme shareholders?  

Now that we know we have an idea of the Umeme buyout amount, what could be in it for shareholders? 

Umeme has since last year been one of the most active counters at the Uganda Securities Exchange, with analysts citing the expected buyout windfall as the biggest push factor for the activity. 

In April last year, the stock posted a gain of 9% to UGX 439.75, a growth that had last been witnessed in June 2023. 

But it slightly declined and by last week, it was range bound at UGX415 ($0.11), with a projected increase ahead of the expiry of the concession.  

The Umeme counter has had frenzied activity, with investors looking at how they could share into the anticipated buyout windfall, whose amount had remained a subject of speculation for over two years now. 

However, government, through State Minister for Finance, Mr Henry Musasizi, last week tabled a proposal that sought Parliament’s approval to borrow $190.9m (about UGX702.7 billion) through a syndicated arrangement with Stanbic Bank Uganda, a subsidiary of South Africa’s Standard Bank Group, as the lead arranger. 

The proposal could be half of the story, but at least informs the public, especially Umeme’s shareholders of what to expect.  

The buyout has been declining and because government has allowed the 20-year concession to end naturally without a premature termination, Umeme will receive an undercut, unlike if it had been terminated before 31, March 2025. 

According to data from Crested Capital, the buyout could have been more if it had been prematurely terminated, say last year.  

For instance, if the concession had been terminated in like 2018, the buyout would have been about $460 million or $449 million in 2020 and $433 million in 2021.

Crested Capital data further indicate that the buyout could have been $407 million if the concession had been terminated in 2022, $339 million in 2023 and $225 million last year. 

However, now that the concession has been allowed to run to its natural term, the buyout has dropped to just $190.9m (about UGX702.7 billion), which according to Crested Capital, gives investors a payout return of UGX 454 ($0.12) per share.  

This is UGX 39 or 9% higher than the current stock price of UGX415 ($0.11), which offers shareholders a premium for their holdings. 

In a report – Umeme Limited Concession Update #2 – Mr Delick Manishimwe, a Crested Capital research analyst, notes that the declining buyout value was due to the terms of the concession agreement, which provided for a higher payout to Umeme shareholders if the concession was terminated before the 20-year period.

Thus, because of this, investors will receive less than if the concession had been terminated, say last year. 

To present a better perspective, Crested Capital notes that based on government’s estimates, which had projected a buyout value of $225 million, investors would have received a payout of between UGX 500 and UGX550, if the concession had been terminated in last year or in the alternative above UGX 550, if the concession had been terminated in 2023 at a buyout value of $339 million.  

Beyond the buyout windfall, Umeme investors will be looking at sharing into the final dividend payout for the 2024 financial year and the first quarter of 2025. 

Crested Capital projects that the full year dividend payout for 2024 could be between UGX 90 and UGX 95 ($0.03), but could below lower at UGX 70 ($0.02), while a much smaller final dividend for the 2025 first quarter would be adjusted for the concession termination and transition-related costs tied to the handover. 

Government and Umeme have already conducted an assets handover, in which formerly leased assets were handed over to Uganda Electricity Distribution Company Limited that will effectively take over power distribution operations from 1^st April, 2025 after the natural termination of Umeme’s power distribution concession.

The exit of Umeme will naturally impact the Uganda Securities Exchange (USE). For more than 13 years, Umeme has been listed on the USE and cross-listed on the Nairobi Securities Exchange. 

However, Mr Manishimwe notes that as an exit strategy, investors could weigh selling now or wait to see if the market price exceeds government’s offer.

 “We advise investors to wait for two things; the final dividend announcement for 2024 [financial year] and the official buyout announcement from government, expected before the end of February,” he says.

The Auditor General is yet to release an audit report into Umeme investment that is expected to determine the final buyout. 

But people familiar with the concession termination and related negotiations have indicated that government was already aware of the amount it will need to fully fund the buyout. Government is expected to fully pay assets that would not have been paid through tariffs by expiry of the concession on 31^st March, 2025 within 30 days, failure of which the payments will be subjected to varying interest.