The Board of directors and management of Vitafoam Plc just obtained approval from its shareholders approving its N4billion capital raising exercise. According to the statement released by the company the amount be raised by issuing securities such as equities or debt by way of public offer, rights issue, debentures, special placing and other options or combination of any of the methods. The Managing Director of the company Mr. Joel Ajiga was also quoted as saying
“A close look in the last few years will reveal to you that Vitafoam is already evolving as a one-stop company that is tailored to meet various needs of the customers. Our strategy is to ensure that the company becomes an integrated business with well-placed subsidiaries that would be developed to satisfy different levels of needs of the customers. In line with this, we have set up some subsidiaries and because of the level which we want this business to attain; there is need for more capital to be injected into the business. The truth is that our shareholders have also seen the need for this, and that is why they have agreed to support us in this idea to raise funds.”
My Initial Reaction
What type of Capital; debt or equity?
Without any other information regarding the proposed capital raising efforts it appears on first reaction that the N4billion capital raising effort will take the form of Equity rather than an issue of fresh debt. Vitafoam currently has about N3.6billion in outstanding debts (Bank loans) and a debt to equity of about 1.09x which they have to somehow pay off sooner rather than later. The debts cost them N542million in un capitalized interest at the end of 2012 FY and has cost about N433million as at the first 9 months 2013. Therefore it is inconceivable that the company will want to increase this debt profile leaving Equity as the only possible option for raising capital.
What to use the money for?
The company MD suggest in a rather unspecific form that they were seeking the funds to consolidate its activities and add more value to the investment of its shareholders. He further went to explain that they had plans to bring up other subsidiaries in addition to the ones it already had to make products that would satisfy the yearnings of its customers. Now that sounds rather unlikely considering that at the end of 2012 FY 97% of revenues came from Vitafoam Nigeria with its Ghana and Sierra Leone contributing the rest. In fact, the Vitapur subsidiary is loss making.
Therefore rather than add more subsidiaries they may want to spend some of that money in repaying its commercial paper debts and concentrate on increasing margins for shareholders. It must now consolidate on its marketing and promotional activities to ensure revenue growth remains robust and above 20% to ensure EPS growth. They must also strive to reduce cost of sale and increase Gross Profit to at least 40% which seem rather unlikely at the end of this period.
As such Organic Growth is the way to go for the company for now rather than growing through acquisitions and amassing loss making subsidiaries. Not that expansion into other regions of growth is not a good strategy but doing that without consolidating on your market share locally and improving its profitability margins. A profit margin of about 3.5% is certainly not an encouraging armoury for inorganic expansion.