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How Centum Used Guarantees In A Multibillion Cola Deal
What are guarantees?
Guaranteesare contractual arrangements in which one party, the guarantor, agrees to assume responsibility for fulfilling the obligations of another party, the beneficiary, if the beneficiary fails to meet those obligations.
Guarantees work as a form of assurance or insurance, providing financial security to the beneficiary in case of any potential losses or liabilities. In business transactions, guarantees are commonly used to mitigate risks and build trust between parties involved.
Why do businesses seek guarantees?
Businesses seek guarantees for various reasons:
1. Risk Mitigation: Guarantees help businesses manage potential risks associated with transactions or contracts. By having a guarantor, the beneficiary is protected against financial losses if the other party fails to fulfill its obligations.
2. Enhancing Creditworthiness: Having a guarantee from a reputable guarantor can improve the creditworthiness of the beneficiary in the eyes of lenders or other business partners. It can serve as collateral, allowing the beneficiary to access financial resources more easily.
3. Meeting Contractual Obligations: Some business contracts or deals may require guarantees to ensure that both parties meet their obligations. It adds a layer of security, especially in large transactions or deals spanning over an extended period.
4. Legal Compliance: In certain situations, businesses may require guarantees to comply with regulatory or legal requirements, such as tax liabilities or performance bonds.
How did Centum benefit from having bank guarantees/
The bank guarantee offered Centum protection against potential tax liabilities from the sale of the bottling businesses. Following a Supreme Court ruling that stopped the KRA from claiming taxes on the bottling firms, the guarantee was reduced by $21.4 million. After an audit of the business assets of the bottlers, the guarantee was further reduced by $8 million.
In this case, the bank guarantee safeguarded Centum’s interests in the buyer-seller relationship, ensuring that it would not be liable for any tax demands or litigations related to the sold businesses. The reduction in the guarantee also contributed to a reduction in Centum’s finance costs.
Overall, the bank guarantee provided Centum with financial security and risk mitigation, allowing the company to proceed with the deal and divest from the bottling businesses without exposure to potential future liabilities. It also demonstrated the confidence of a reputable financial institution (Stanbic Bank Kenya Limited) in Centum’s ability to fulfill its obligations.
How Centum Used Guarantees In A Multibillion Cola Deal
What are guarantees?
Guarantees are contractual arrangements in which one party, the guarantor, agrees to assume responsibility for fulfilling the obligations of another party, the beneficiary, if the beneficiary fails to meet those obligations.
Guarantees work as a form of assurance or insurance, providing financial security to the beneficiary in case of any potential losses or liabilities. In business transactions, guarantees are commonly used to mitigate risks and build trust between parties involved.
Why do businesses seek guarantees?
Businesses seek guarantees for various reasons:
1. Risk Mitigation: Guarantees help businesses manage potential risks associated with transactions or contracts. By having a guarantor, the beneficiary is protected against financial losses if the other party fails to fulfill its obligations.
2. Enhancing Creditworthiness: Having a guarantee from a reputable guarantor can improve the creditworthiness of the beneficiary in the eyes of lenders or other business partners. It can serve as collateral, allowing the beneficiary to access financial resources more easily.
3. Meeting Contractual Obligations: Some business contracts or deals may require guarantees to ensure that both parties meet their obligations. It adds a layer of security, especially in large transactions or deals spanning over an extended period.
4. Legal Compliance: In certain situations, businesses may require guarantees to comply with regulatory or legal requirements, such as tax liabilities or performance bonds.
How did Centum benefit from having bank guarantees/
Centum Investment Company benefited from having a bank guarantee when it sold stakes in Nairobi Bottlers and Almasi Beverages to Coca-Cola Beverages Africa (CCBA). As part of the deal, Centum provided a bank guarantee of $34.4 million to compensate CCBA for any potential claims, including tax demands from the Kenya Revenue Authority (KRA).
The bank guarantee offered Centum protection against potential tax liabilities from the sale of the bottling businesses. Following a Supreme Court ruling that stopped the KRA from claiming taxes on the bottling firms, the guarantee was reduced by $21.4 million. After an audit of the business assets of the bottlers, the guarantee was further reduced by $8 million.
READ MORE: How to evaluate risk before seeking bank guarantees.
Was this strategy a success?
In this case, the bank guarantee safeguarded Centum’s interests in the buyer-seller relationship, ensuring that it would not be liable for any tax demands or litigations related to the sold businesses. The reduction in the guarantee also contributed to a reduction in Centum’s finance costs.
Overall, the bank guarantee provided Centum with financial security and risk mitigation, allowing the company to proceed with the deal and divest from the bottling businesses without exposure to potential future liabilities. It also demonstrated the confidence of a reputable financial institution (Stanbic Bank Kenya Limited) in Centum’s ability to fulfill its obligations.