By CHRIS UGWU writes
The current state of equities market offers companies opportunities to bank on rights issue to boost their capital. CHRIS UGWU writes
A rights offering, also known as a rights issue, has to do with issuing of rights by a company to its shareholders to purchase additional stock shares at a discounted trading price.
These rights are typically transferable, allowing shareholders to sell them to another investor or to an underwriter.
A rights offering spreads a company’s net profit over a wider number of shares. Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution.
However, if the company is using the extra capital raised to fund expansion, it can eventually lead to increased capital gains for shareholders. According to Investopedia, companies most commonly issue a rights offering to raise additional capital.
A company may need extra capital to meet its current financial obligations, or it may simply seek extra capital to fund expenditures designed to expand the company’s business, such as acquisitions or opening new facilities for manufacturing or sales.
In an economic downturn, which Nigeria finds itself, rights issues can be a viable option for companies operating in the country to leverage to enable them get out of the woods of economic headwinds. Since the global financial meltdown about a decade ago, world over, companies have resorted to raising most capital through rights issue.
For example, in Nigeria, the interest rates from the nation’s commercial banks are either unaffordable or inaccessible.
To this end, most firms have seen their debt and cost of servicing debts increase to unbearable levels. Also, in a bearish market where IPO becomes a mirage for companies to raise capital due to investor apathy, embarking on a rights issue becomes handy and cheaper way of fund raising. That’s why there is current surge or perhaps clamours for rights issue by some companies to leverage on the increased investor confidence to meet operational and investment needs.
Funds raised in H1
Investigation by New Telegraph showed that funds raised during the first half year 2017 by way of rights issue include UACN Property Development Company (UPDC) Plc, N5.2 billion, Portland Cement Plc, N1.02 billion , Livestock Feeds, N750 million and Meyer Plc N218 million.
The proceeds from Livestock Feeds’ N730 million rights will be deployed as working capital to enhance its profitability. The company’s Chairman, Larry Ettah, expressed optimism on the success of the offer, noting that the market was beginning to record some activities in the primary market segment.
Other rights issue expected in H2
Some of the companies listed on the Exchange plan to expand their businesses through right issues this year. These include Lafarge Africa, N140 billion rights issue, which is expected to attract patronage from investors.
The Chairman of the company, Bolaji Balogun, while addressing shareholders during an investors’ forum in Lagos, recently, explained that the move would help reduce the company’s debt profile, improve cash flow and position the firm for future expansion.
Union Bank recently received shareholders approval to raise N50 billion through rights issue. According to the Chief Executive Officer, Emeka Enuma, the fund would be used to finance the bank’s growth strategy.
For Wapic insurance, its N10 billion rights issue is a proactive step towards getting the company ready and set for a much-anticipated regulatory increase in the minimum capital of insurance companies.
This, according to Wapic Chairman, Aigboje Aig- Imoukhuede, is particularly instructive in view of the recent adoption of the Risk-Based Supervision model by the National Insurance Commission (NAICOM), and the directive to insurance companies to implement the Solvency II Capital Allocation model by 2018. C and I Leasing is also seeking N100 million additional capital to expand its fleet operations.
The Group’s Chief Finance Officer (CFO), Alex Mbakogu, while addressing investors at an investors’ forum recently in Lagos, said the Group would be raising more capital from its already multiple contracts with the International Oil Companies (IOCs) on its offshore support vessels and related marine services.
Furthermore, he added that the company planned to raise the money at a time its businesses were on the trajectory of growth. Following shareholders approval received in May, Unilever Nigeria Plc also received clearance of the issue documents from the Securities and Exchange Commission and the Nigerian Stock Exchange (NSE) in respect of rights issue.
The transaction is part of the company’s strategy to drive sustained and steady growth despite economic headwinds. The company plans to raise N58,851,275,010 by way of rights to existing shareholders, on the basis of 14 new shares for every 27 shares held by shareholders, whose names appeared in the register of members of the company as at 28 June 2017 at an issue price of N30 per share.
At the signing ceremony, which held at Unilever Nigeria’s head office in Lagos, on 13 July 2017, Yaw Nsarkoh, the Managing Director of Unilever Nigeria, commented: “Through this Rights Issue, we will be able to reinforce our financial flexibility to support our growth initiative and also give shareholders an opportunity to consolidate their shareholding position.
“The management and board of UACN Plc made proposal to help its subsidiaries to raise about N15.4 billion rights issue.”
According to a notice to the NSE, the board said it needs an enhanced capital of N7 billion for Grand Cereals Limited; Livestock Feeds Plc (N0. 75 billion). The Board explained that these subsidiaries needed working capital support during the procurement season of November/ December, which their banks would not provide timely, thus endangering the performance of the subsidiaries.
Guinness Nigeria Plc had on March 15, 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 totalled N39.7 billion. The qualification date for the rights issue was Wednesday March 15, 2017. The company intends to use the funds to deleverage its balance sheet given its relatively high debt level; finance its working capital needs; and expand its operations, among others.
Market operators are of the opinion that the recent resurgence recorded in the primary market in terms of activities, is an indication that the investing public is gradually coming back to the market, largely due to reforms in the secondary market, which has attracted both foreign and local investors to the market in recent times.
Managing Director/CEO, High Cap Securities Limited, David Adonri, said that as the economy recovers from stagflation, confidence is gradually being restored in the capital market. Issuers’ confidence is also increasing hence, increase in primary market activities.
He said : “If secondary market momentum is sustained, more activities should be expected in the primary market and we will see more companies raising funds in the second half.
“The equity market is currently witnessing an uptick in activities. A combination of the change in asset allocation rules for Pension Fund Administrators (PFAs) and opening of a window for investors and exporters has led to a sustained rise in the price of equities.
The rising appetite for equities means an equity offer may witness a high level of subscription.” Reacting to the development, an analyst with Delloit Investment Limited, Tunde Oyediran, said the recent improvement in the stock market would revive the primary market, noting that it was an indication that investors were regaining their confidence in the market.
He pointed out that the impact of the primary market activities on any market could not be overemphasised, adding that it deepened and expanded the market, as witnessed in 2010, with the introduction of Dangote Cement.
This, according to him, has contributed to increase in market capitalisation and overall growth of the market. “This signal is good for the market; no capital market in the world grows the market only on secondary market activities. The recent increase in activities through right issues of companies is an indication that investors have realised the importance of long-term investment in good companies that have future prospect.
According to Managing Director/ CEO, APT Securities & Funds Limited, Mr. Kasimu Kurfi, “The recent coming of rights issues after a long break of public issues in the NSE is not a surprise to us. If you observed most of the companies coming with the rights issues, they have core investor among its shareholders. Most of the multinational companies rush for same, such as Guinness, WAPCO, Unilever and many others on the way to come.
The adoption of rights issues is a trade off of other options for capital injection such as bank loans, corporate bonds and a host of other financing instruments. As Nigeria’s conomy continues to recover, it is expected that more companies will be seen raising further funds either by way of rights or public offering.