British firm CDC bets Sh14 billion on Kenya cement sector

ARM chief executive Pradeep Paunrana.
ARM chief executive Pradeep Paunrana. PHOTO/FILE
The booming Kenyan cement sector has proved attractive to a UK-based development financier, CDC, which recently bought a 40 per cent stake in Nairobi Security Exchange-listed cement maker ARM Cement.

The Sh14.1 billion deal, which is CDC’s first investment into the African cement industry will leave the family of ARM’s chief executive Pradeep Paunrana holding a 30 per cent shareholding with the rest remaining in free float.

The cash injection will enable ARM to retire costly short-term loans that have undermined the profitability of the NSE-listed firm.

ARM, which operates under the brand name Rhino Cement, will spend 11.1 billion to settle its expensive debt which jumped 35 per cent to Sh14.4 billion in the nine months to September last year – raising the company’s finance costs three times to Sh1.1 billion.

“This investment will strengthen a company making a difference to the local economy, bringing jobs and lowering cost of raw materials to a region traditionally dependent on imports,” CDC managing director for equity investments Mark Pay said in a statement announcing the transaction.

ARM was initially seeking for a strategic investor who was to inject Sh12.6 billion into the business. The company has now chosen to work with an equity investor (CDC) – a cheaper funding alternative that will, however, see the founders part with a large portion of the firm.

“We chose CDC as an investor and partner to help us achieve a shared vision of creating the leading and lowest-cost East African cement business,” Mr Paunrana said. “This is a significant milestone in ARM’s journey.”

CDC’s capital will in the short-term support ARM’s plans to expand cement production in Mwingi in central Kenya helping to bring down the cost of cement to customers located far from the coastal cement manufacturers.

The cement sector has enjoyed rapid growth since 2010, buoyed by the booming construction industry.

Official statistics show that cement production went up by 8.0 per cent from 5,882.5 thousand tonnes in 2014 to 6,352.9 thousand tonnes in 2015. Cement consumption and stocks rose 9.9 per cent to 5,708.8 thousand tonnes in 2015 from 5,196.7 thousand tonnes in 2014 due to increased demand for cement in the country.

ARM was founded in 1974 by the late HJ Paunrana, the father of the current chief executive, and has grown into East Africa’s second largest cement manufacturer with a 15 per cent market share.