Solar Plant Investment and Board Governance at Danladi Group
Kano-based family conglomerate Danladi Group has a six-person board: the 72-year-old founder-chairman, his two sons (CEO and commercial director), a cousin (finance director), and one 'independent' director who is the founder's personal lawyer and receives annual legal fees. The audit committee has not met for 18 months. Management proposes a ₦12bn solar assembly plant, funded 40% by debt and 60% by retained earnings. The board paper shows NPV of ₦2.1bn at an 18% discount rate, IRR of 24%, and payback of 4.2 years. It assumes 35% market share by year three, unchanged import tariffs, and no naira depreciation, although 60% of components are imported. The plant land is owned by the CEO's nephew; the paper says the price is 'to be negotiated'. Group EBITDA is ₦3.5bn and net debt is ₦4.0bn; the bank covenant is 2.5x. The chairman wants approval at the next meeting, before an independent market study is completed.
1. Evaluate the investment case and its impact on the covenant. What decision should the board take on the current paper?
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Investment case: the NPV of ₦2.1bn and IRR of 24% are only as good as the assumptions. The paper assumes 35% market share by year 3, unchanged tariffs and no naira depreciation, while 60% of components are imported. Each is a material risk. A simple sensitivity shows the problem: if market share is 20% instead of 35%, revenue falls by about 43%; if the naira depreciates 20%, imported costs rise by 20% in naira; if tariffs are cut, local assembly loses protection. The NPV could turn negative. The payback of 4.2 years is long for a technology product with rapid cost declines.
Covenant: debt is 40% x ₦12bn = ₦4.8bn. Net debt rises from ₦4.0bn to ₦8.8bn. Before any new EBITDA, net debt/EBITDA = 8.8/3.5 = 2.51x, above the 2.5x covenant. During construction there is no EBITDA, so a breach is likely unless the bank gives a waiver or equity is injected. The project also consumes ₦7.2bn of retained earnings, reducing liquidity and dividend capacity. The board should not approve on the current paper. It should require an independent market study, a bottom-up financial model, scenario and sensitivity analysis, a funding plan that preserves covenant headroom, and a staged investment with a stop/go gate.
2. Identify the governance and related-party failures in the proposal and recommend a board process to address them.
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Governance failures: (1) Board independence: the only 'independent' director is the founder's lawyer receiving fees; he is not independent. (2) Related-party transaction: the land is owned by the CEO's nephew. This is a related party; the CEO should disclose, recuse from board discussion and voting, and the price must be supported by an independent valuation and, if material, shareholder approval. (3) Audit committee dormant for 18 months: a group of this size needs an active audit committee; it should be reconstituted with independent members. (4) No risk committee and no independent market study before approval. (5) Chairman pressure to approve before due diligence is a governance red flag.
Process: establish an independent special committee of truly independent directors, not the lawyer, with authority to appoint advisers. Obtain a market study, technical and EPC review, environmental and local-content review, legal and tax review, FX and offtake analysis, and an independent valuation of the land. Require the CEO and any conflicted director to recuse. The board should approve in stages: feasibility, pilot, final investment decision, with gate criteria. Disclose related-party dealings and governance weaknesses to shareholders and lenders. If the group is serious about scale, recruit independent directors and separate the chairman and CEO roles.
3. Recommend risk mitigations and conditions precedent that should be attached to any approval.
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Risk mitigation and conditions: (1) Commercial: secure binding offtake or letters of intent for at least 50-60% of output before capex; do not rely on 35% market share. (2) FX: hedge imported component exposure or index tariffs to USD; negotiate a local-content plan to reduce import dependence. (3) Tariff and policy: obtain written confirmation of tariff treatment; build a downside case with zero protection. (4) Technical: use a fixed-price EPC contract with performance guarantees and liquidated damages; phase capacity. (5) Funding: inject more equity, obtain a covenant waiver or headroom, and arrange a standby facility; do not drain retained earnings. (6) Governance: related-party land at independent valuation; recusal; audit committee approval; board skills in energy and risk. (7) ESG: land title, environmental impact and community engagement. Recommendation: defer approval; authorise a feasibility stage with a budget, not the full ₦12bn; set conditions precedent. If the chairman insists, record dissent and seek legal advice on directors' duties.