How AHL Group was brought to its knees

It may not be immediately, but AHL Group as we know it may die the same way Malawi Development Corporation and Admarc Investments Limited—two major venture arms of the government that had vast interests in the sectors that matter to the Malawi economy—were brought to their knees and eventually vanished.

They both died because, first, they borrowed too expensively to finance politically driven projects whose return on investment was bound to be troubled, second, they over-diversified their business investment portfolios even into areas they had little expertise in and third, gross mismanagement and abuse at the behest of the ruling political elite also played a role.

If you look at AHL Group’s now tortured story and when its troubles began, it has basically followed paths similar to the two companies’—and is likely to replicate their fate.

For decades, Auction Holdings Limited (AHL) was predominantly a tobacco marketing company—not buying, but providing a platform where the leaf’s growers and buyers can meet and trade.

During most of this time, AHL had Agriculture Trading Company in its stable, which made sense as it was selling agriculture-related inputs, equipment and hardware as well as offering services in industrial and domestic pest control.

TIL Limited, established in the 1980s; also made sense with its tobacco re-handling for AHL. Then it lurched into manufacturing of agricultural chemicals, iron sheets and other steel products under a company called AHL Chemicals and Steel Limited. That was a big leap for a company without manufacturing experience.

I also think it was easy for AHL to take such risks at the time given how much it was raking in from the auction floors where it was a monopoly so there was enough cash flow for such investment forays.

But around 2005/06, AHL made serious miscalculations and dangerously misread the market as its executives their tried to pander to politicians. Then President Bingu wa Mutharika had been having a bitter feud with international tobacco buyers operating in Malawi over what Bingu believed were exploitative prices at the auction.

The battle became so bad that Bingu later ordered the deportation of some tobacco buyer executives. In his anger, Bingu was convinced that he can do without them and when that failed and prices started crushing, Bingu knew the political cost to him and his party would be high.

Suddenly, there was talk of establishing a locally-owned “indigenous” tobacco merchant that would take the green gold to the global market.

The Bingu administration must have nudged Admarc—whose board and chief executive officer were Democratic Progressive Party supporters—to push AHL into setting up a tobacco buying company.

The board of AHL—a company 100 percent owned by Admarc—and whose board also had links to the ruling party, quickly facilitated the idea. And just like that Malawi Leaf Limited, wholly owned by AHL, was born.

But several important things were conveniently overlooked and those issues are haunting AHL Group today. The first was that the business case for the company was weak.

Tobacco prices had plunged and with the ruthless anti-smoking lobby and the local cartel of international tobacco merchants working together, profitability of Malawi Leaf would always be in doubt.

In fact, at the time Malawi Leaf was being introduced, there was frantic consolidation in the industry, with players either merging or closing all together. Instead of seeing that as a red flag, AHL—in an effort to boost Bingu’s political ego—sold that market consolidation to investors such as PTA Bank as an opportunity.

Also, at that time, AHL was losing money as a wave of reforms in the tobacco sector removed most of the levies and fees that formed the bulk of its revenue. That, coupled with low tobacco proceeds on the back of historically low prices, AHL’s financial position would make it difficult to afford starting from scratch a new company that required huge capital outlays.

Again, contract tobacco farming—otherwise known as Integrated Production System—was taking root, which meant that merchants were buying more of their tobacco directly from farmers than through the floors, thereby reducing volumes that pass through the floors. Less volume meant even less money for AHL.

With dwindling revenue and doubts on whether local banks would finance such a massive venture, government facilitated a loan for AHL from PTA Bank. And so in 2006, Malawi Leaf started its operations.

I don’t know how much the loan was, but by 2016/2017, AHL Group was gasping for breath, with K44.4 billion in annual loss. The group complained that its external auditors had included about K40 billion outstanding loan Malawi Leaf had with PTA Bank as an expense; hence, the huge ‘technical’ loss.

Bottom line: AHL Group was so broke it could not pay PTA Bank and was asking for a restructuring of the facility. Today, four years later, I don’t know how that loan stands. Apart from that, auditors also found an unexplained expenditure of K1.6 billion at Malawi Leaf that remains a mystery.

Meanwhile, seven years after starting Malawi Leaf—AHL also went on another expensive venture in 2013—the AHL Commodities Exchange, a good idea on paper that also appears to have been oversold to PTA Bank, but which really was another politically inspired idea helping to drag down AHL.

Today, the group can’t afford to pay its workers—most of who stayed as long as five months without being paid their salaries until its shareholder, Admarc, itself a very broke and mismanaged entity, lent the company K6 billion this month to pay workers.

But we both know where that money came from, the taxpayer, because Admarc doesn’t have that kind of cash. But even that won’t save the once-upon-a-time dinosaur of a company.