Predominance of rights issues and ownership structure challenges

Chief Executive Officer (CEO) of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema

With the prevalence of rights issues in the nation’s capital market in 2017, stakeholders have raised concerns of possible effect on ownership structures of listed firms that embarked on the exercise.
 
The stakeholders, who expressed worry on the quantum of rights issues floated in the market last year, totaling over N360 billion cited the influence of foreign core investors in some multinational companies.
 
This, according to them may result in a greater tendency to trigger change in ownership subsequently to the detriment of the local shareholders.
 
Right issues are the options given by a company to the existing shareholders to buy the shares of the company.

It is also known as right of Pre-emption; whenever a company wants to issue additional shares first of all these shares are to be offered to the existing shareholders.
 
Indeed, the motive of the exercise is to ensure concentration of control in the hands of existing shareholders but shareholders avail the benefit of it from cost point of view.

They are offered shares at a price, which is less than market price and this may result to shareholders developing ‘cold feet’ and may not pick their rights.
   
Furthermore, some local shareholders at that time of the rights were financially handicapped while others were not convinced on the management of these companies as at the time of allotment.
 
They argued that those shares that were denounced by Nigerian shareholders were allotted to the technical partners that requested for additional units and that puts us to a disadvantaged position since the new listing rules allow a core investor to hold up to a maximum of 80 per cent instead of the initial 70 per cent which Nigerian shareholders described as detrimental to their investment.
 
Right issue may have beneficial informational content. The share price may increase in response to this information and affect the shareholders wealth.

For instance, shareholders of GlaxoSmithKline Nigeria had last year, listed conditions for accepting the bid by GSK United Kingdom to raise its shareholding to 75 per cent from 46.4 per cent.
 
“There must be something for both to take away from the table at the end of the day.

That is what we are in the process of arranging now that we are to resume talks afresh”, said Olusegun Osunkeye, Chairman, and Board of Directors. 

He spoke at a media parley at the end of the court-ordered meeting.
 
He said: “We feel it will be mutually beneficial for all shareholders to withdraw the scheme to allow for further consultations.

We are going back to the drawing board, that is, GSK UK and GSK Nigeria to look at the new Scheme of Arrangement and to look again at the terms; so that with those two when concluded, further announcements will be made,” Osunkeye said.
   
Against the backdrop of economic woes which significantly impacted the Nigerian capital market in 2016 recording zero capital raise, not fewer than fourteen companies quoted on the NSE raised N340.6 billion by way of rights issues in 2017, in preparation for boom in economic activities in the post recession era.
   
Existing quoted companies need additional funds for expansion and some of the entities, including banks are planning to fund new growth sectors of the economy undergoing privatisation; so fresh capital is required and in the current environment, probably possible through rights from existing shareholder;
     
Five of the companies dominated the rights issue boom accounting for 94 percent of the N340.6 billion.

These are Lafarge Africa Plc 39 percent), Unilever Plc (17 percent), Union Bank Plc (15 percent), Guinness Plc (12 percent) and Flour Mills Nigeria Plc (12 percent).
 
This is in sharp contrast to the previous year, 2016, when declining economic growth and woeful stock market performance as well as foreign exchange uncertainty scared investors from the NSE and also companies from raising fresh funds either through public offer or Right Issue.
 
Specifically, Rights Issues floated in H1’ 2017 are : UACN Property Development Company, UPDC which raised N5.2 billion; Portland Paints and Products Nigeria Plc, PPPN N1.02 billion; Livestock Feeds, N750 million; and Meyer Plc N218 million.
 
UACN Property Development Company offered 1,718,750,000 ordinary shares of 50 kobo each at N3.00 per share. The gross issue proceeds stood at N5.2 billion.
 
Portland Paints opened its N1.2 billion Rights Issue on February 7, 2017 through a rights issue of 600 million ordinary shares of 50 kobo each at N1.70 per share.

The provisional allotment for the Rights Issue is on the basis of three new ordinary shares for one ordinary share. The application list closed on Wednesday, March 1, 2017.
 
Livestock Feeds raised N750 million Rights Issue, involving 1,000,000,000 ordinary shares of 50 kobo each at N0.75 per share on the basis of one new ordinary share for every two ordinary shares held. The offer opened on Tuesday, April 18, 2017.
 
Paint manufacturer, Meyer Plc opened its Rights Issue of 291 million shares at 75 kobo per share. The offer opened on Monday 9th of January 2017 and closed on Wednesday, February 15, 2017. The shares of the company were allotted on the basis of one new share for every one share held.
 
For the second half, H2’17, the ten companies that submitted applications to the NSE and have commenced their Rights Issue fund raising are: Lafarge Africa Plc, N131.56 billion; Guinness Nigeria Plc, N39.7 billion; UACN Plc, N15.4 billion; Union Bank Plc, N49.75 billon; Unilever Nigeria Plc, N58.85 billion; and Flour Mills Nigeria Plc, N39.86 billion.
 
Others are Mutual Benefits Assurance Plc, N2.0 billion; Consolidated Hallmark Insurance Plc, N500 million; Morison Industries Plc, N502 million; and Trans-nationwide Express Plc N239 million.
 
Lafarge Africa Plc had the highest Rights Issue since the stock market crashed in 2008. The rights issue of 3,097,653, 023 ordinary shares of 50 kobo each at N42.50 per share commenced on 20th November 2017. The total value stood at N131.56 billion.
 
Guinness Nigeria Plc: The company had on March 24, 2017, through its stockbroker, Stanbic IBTC Stockbrokers Limited, submitted an application to the NSE for approval and listing of a rights issue of 684,494,631 ordinary shares of 50 kobo each at N58.00 per share on the basis of five new ordinary shares for every 11 ordinary shares held. The value totaled N39.7 billion.
 
Reacting to the development, the Founder, independent shareholders association of Nigeria sir Sunny Nwosu, in a telephone interview with The Guardian, said it is very obvious that there would be change in ownership structure of companies that floated rights issue in 2017 especially the multinationals.
 
According to him, some local shareholders at that time of the rights were financially handicapped, while others were not convinced on the management of the companies.

In this article:
NSEOscar Onyema
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