Centum Investment Company now faces a smaller potential liability of Sh1.5 billion from the sale of its stakes in the local Coca-Cola bottling businesses.
The Nairobi Securities Exchange-listed sold its 27.6 percent stake in Nairobi Bottlers and 53.9 percent interest in Almasi Beverages —the owner of Mt Kenya Bottlers, Kisii Bottlers and Rift Valley Bottlers — to Coca-Cola Beverages Africa (CCBA) for Sh19.3 billion in 2019.
As part of the deal, Centum committed to providing a bank guarantee of $34.4 million (Sh4.1 billion) to CCBA to compensate the buyer for any potential claims, including tax demands from the Kenya Revenue Authority (KRA).
The Supreme Court earlier this year stopped the taxman from claiming taxes on the bottling firms, a move that saw Centum’s potential liabilities from the transaction fall by a substantial amount.
“During the year ended March 31, 2022, $21.4 million of the CCBA guarantee was discharged following the Supreme Court’s ruling on the excise duty claim in favour of the bottlers,” Centum says in its annual report for the year ended March.
“The third-party guarantee from Stanbic Bank Kenya Limited stands at $13 million (2021: $34.4 million). The guarantee is in respect of any claims that were unknown as at the sale date which may later come up.”
The company added that no claims had come up as of March this year, noting that the guarantee matures seven years from September 2019.
The deal with CCBA was completed despite the KRA seeking a total of Sh5.6 billion excise taxes on returnable bottles from the bottling companies.
Centum’s exposure was, however, smaller because it did not fully own the businesses at the time of selling them to CCBA, which is majority-owned by Atlanta-based soft drinks giant The Coca-Cola Company.
KRA’s tax demand was thwarted in a Supreme Court ruling delivered on February 10, 2022, which stopped the taxman from reopening the matter, freeing Centum from the obligation.
After agreeing on the compensation deal with CCBA, Centum obtained a guarantee from Stanbic Bank Kenya Limited to cover the full amount and the facility was charged on Centum’s portfolio of marketable securities, which includes Treasury bonds.
The Supreme Court said the KRA should let the matter rest after losing in lower courts.
“We note that the dispute commenced in the High Court in October 2012, 10 years ago, then moved to the Court of Appeal, over nine years ago in July 2013,” the apex court said in the ruling.
“To start the case all over again, for no fault of the respondents, is not only unconscionable but also insensitive and cruel.”
The KRA sought to collect excise taxes on costs incurred during washing and sanitizing returned bottles between 2006 and 2009.
Bank guarantees are common in mergers and acquisitions, with buyers hedging against liabilities such as taxes and contract disputes that may materialize after the deal is closed.
Source: Business Daily