KENYA – The competition regulator has rejected retail chain Tuskys’ proposed merger with troubled Nakumatt Supermarkets, arguing that the application for regulatory review was done under the wrong clause of the antitrust law.

In a letter to the two retailers seen by the Business Daily, the Competition Authority of Kenya (CAK) has advised that a fresh application be made for an exemption from regulations on anti-competitive behaviour rather than approval for the merger they had sought.

The CAK reckons that the proposed transaction does not amount to a merger since Nakumatt’s ownership structure will not change upon conclusion of the deal.

The two retailers are pursuing an agreement that will see Tuskys provide management services, a loan, and debt guarantees to Nakumatt.

Tuskys would have control over operations, even as Nakumatt’s ownership remains unchanged.

The CAK says its understanding of the proposal is that the “the parties have not entered into a substantive share purchase agreement” and that Tuskys has simply proposed to “principally act as a guarantor for the supply of goods to Nakumatt”. Therefore, the deal cannot be a merger, says the regulator.

The CAK holds that what the two companies are proposing falls under the class of restrictive trade practices, which need legal exemption.

The regulator has therefore rejected the merger application, offered a refund of filing fees and asked the companies to submit a fresh application for an exemption.

“Lastly, furnish us with your clients’ bank details so as to enable the authority to refund the [Sh]2,000,000 that had been remitted as merger filing fees,” the CAK says in the letter to Nakumatt and Tuskys lawyers.

Tuskys and Nakumatt did not respond to calls for comment on this story.

The law requires that when two competitors in the same sector enter agreements that may distort competition, they need regulatory approvals.

Such deals include agreements in which one company gets an insider’s view of the other’s strategy or supply contracts that might amount to collusive tendering.

Failure to get approvals for such deals may result in their stoppage and imposition of financial penalties on the parties involved.

The CAK directive is likely to slow down an urgently needed rescue plan for debt-ridden Nakumatt, which has in recent months been rapidly ceding its position in the market with multiple closure of stores.

Nakumatt and Tuskys are now expected to act as directed to avoid further regulatory trouble.

The CAK had earlier this month said Tuskys’ plan to restock some of Nakumatt’s empty shelves without regulatory approval had the potential of distorting competition in the market.

It is not clear how the CAK’s probe into the incident is progressing. CAK director-general Wang’ombe Kariuki did not respond to calls or text messages on the subject.

This is not the first time Tuskys is running afoul the antitrust watchdog.

The company was in 2014 fined for anti-competitive behaviour arising from a 2013 agreement in which it was to manage some of Ukwala Supermarkets’ branches.

The Nakumatt-Tuskys deal is also facing objections from a key Tuskys shareholder. The CAK had earlier this month written to Tuskys asking it to resolve shareholder wrangles after one of the owners, Yusuf Mugweru, filed an objection to a potential merger between the two retailers.

Businessman Humphrey Kariuki, who has interests in WOW Beverages, has also written to the CAK raising concerns that Nakumatt could “drag its troubles” to Tuskys, sending a shockwave through Kenya’s retail sector.

Initially, Tuskys had sought to acquire a 51 per cent stake in Nakumatt in a buyout deal that would have seen long-time chief executive and main shareholder Atul Shah quit management of the company. But the plan was later abandoned in favour of a merger.

Tuskys had, in the rejected merger application, indicated that it planned to loan Nakumatt up to Sh650 million to offset costs such as rent and salaries.

Tuskys had also said it would offer payment guarantees of up to Sh3 billion to suppliers.

Nakumatt owes its creditors more than Sh30 billion and its inability to pay suppliers and landlords has seen it close retail outlets at key shopping malls in Kenya and Tanzania, including Nairobi’s Westgate and Thika Road Mall.

Meanwhile, a High Court judge has rejected Nakumatt’s application to have an administrator appointed to run the business, opening the door for possible liquidation.

The court argued that Nakumatt had not provided enough evidence that it had a realistic chance of getting back on its feet.

That has signalled that the 90 creditors, who appeared in court, may have difficulty recovering their money as Nakumatt is owned through a company registered in Mauritius.

Other retailers are already stepping into the empty spaces left by Nakumatt. Tuskys has taken over two outlets vacated by Nakumatt in Kisii and Kisumu. French retailer Carrefour is now operating from the space Nakumatt occupied at the Thika Road Mall.

South African retailer Game plans to open its second retail outlet in Kenya at Waterfront Karen in a space that had been previously set aside for Nakumatt.

Business Daily