White Knight for Shabka Holding: The Saudi Investor

If you don't recall the rather sad story of Shabka Holding, here's the earlier link.

Earlier this week, Shabkha held its annual general shareholders meeting.  There were reports in several Kuwaiti papers.  Let's go to the largest circulation paper in Kuwait (and a princely one at that) for the details. 

The meeting proceeded with 63% of shareholders present.  Not a hard trick since Nayef Abdul Aziz Abdullah Al-Enezi, Chairman and Managing Director, holds 40.65% and Dr. Badr Abid AlThafiri, CEO holds 12%.  Both bought sometime in early 2009 if I'm not mistaken.

To get an idea of the problems that Shabka faces, let's review some details provided by AlThafiri who spoke to reporters at the meeting. 

There is an ongoing dispute with International Leasing and Investment.  Shabka has asked the Islamic Development Bank (Jeddah) which holds shares in both Shabka and International Leasing (roughly 28% in the latter!) to mediate.  

The dispute relates to related party transactions in the amount of KD22 million which are in the form of "wakala investments".  In addition to a contract to buy 7% of the shares of Athman  (Athman Investments in which I believe International Leasing was and may still be a shareholder) which led to additional losses of KD19 million.  

As a side note, you'll recall that in late March AlEnezi accused International Leasing of selling assets to Shabka at above market prices.  The sales he asserted were not ratified by the shareholders annual general meeting but approved at the board level (which IL controlled).  His assertion is that if these contracts were unwound, Shabka's losses would be KD5 million less than current.  

Back to the article, he says that current losses are some 68% of total capital as of year end 2009 and that this is an improvement from 233% as of year end 2008.  Shabka's 2009 financials aren't posted on the KSE yet.  Its 31 December 2008 financials show negative equity of KD7 million - the 233%. That would make the losses roughly KD10 million at 2009 year end.

Back to the article, during 2008, the previous shareholders increased the capital in the company from KD5 million to KD15 million (this refers to the legal capital - par value times the number of shares outstanding).  Since the shares were offered at KD0.250 per share (a KD0.150 premium per share), the gross amount of the capital increase would appear to be some KD25 million - though surprisingly elsewhere in the article AlThafiri says the the share premium account only holds KD9.93 million - leaving roughly KD5 million not accounted for.  Since Shabka has not yet published its 2008 financial report, one cannot come to a firm conclusion with what happened.  In any case, AlThafiri says that once the new board took over, they discovered the firm's assets were KD400,000.  He attributes the difference to use by some members of the previous board to acquire control over Abraj.  (AA:  This could be AlAbraj Holdings, which by the way owns 39.3% of International Leasing.)  And that there was only KD7 in Shabka's accounts.  That's not a typo.  Seven dinars.

To deal with its problems, the shareholders agreed at the AGM to:

1. Use the KD9.93 in the Share Premium account to cover some of the losses. This and other amounts appear sufficient to cover the 2009 losses.
2. Increase paid in capital from KD15 million to KD50 million.  No discussion of the price of the offer.  Shabka's shares have a nominal value of KD0.100.
3. An unnamed Saudi investor is willing to step up for 70% of the capital. 

Two puzzling things from that latter point:

1. Who the investor is?
2. Why he is stepping up?  It's not as though Shabka has a lot to offer, except for its license.

One final point, as disclosed in its 30 June 2008 interim financials, IL bought 70% of Shabka during the first six months of 2008 for some KD32.4 million. During that same period it sold 15.1% of the company for KD23.2 million.  You can do the math.  A good return.  And I suppose a "wise" investment for someone.  And also as disclosed, was in the stages of selling the rest of its investment. Shabka traded as high as KD0.590 in the second half of 2008.  Its last trade was at KD0.044 on 31 March 2009 before it was suspended by the KSE for failure to provide financials.