Background
Oando announcement of rights issue in 2014 commenced with controversy. It initially announced plans to raise $300 million (N48,779,834,048) via a rights issue, starting from Nov. 24 and closing December 19 2014. The rights issue was subsequently suspended after it emerged SEC had not approved the rights. They now moved the rights issue to commence December 3rd 2014 and was to close January 14th 2015 before being subsequently postponed by two weeks to close January 28th 2015.
Just as Oando commenced the rights issue on controversial terms it is set to close it on another controversial note. On Tuesday, January 27 and just one day to when the rights is expected to close, the company announce it was adjusting the price of the offer from N22 to N16.5 on a basis of one (1) new ordinary share for every four (4) instead of one (1) new ordinary share for every three (3) ordinary shares of 50 kobo held as at 25 July, 2014.
Why the price adjustment
In Oando’s own words “This revision was required to better align the terms of the Rights Issue with current market conditions, given the 28% fall in the NSE All Share Index over the last 3 months.” Oando share price closed today at N15.88 and if left as is would have been a 38.5% discount to the rights issue price. Based on this price differential, it basically made no sense for anyone to take up the rights at that price which was why they had to revise the terms of the offer. But nevertheless, is that the right thing to do?
Why This Revision is bad
Rights Issue Price – Oando rightly claims that their rights issue price of N22 is now trading at a huge premium to the open market price of the stock suggesting that it was short-changing shareholders. However, they forget to mention that when they opened on December 3rd the share price closed that day at N20 and traded at a high of N20.85. The rights issue price (N22) at the time was trading at 10% premium to the open market price. That would be Oando highest price since the rights issue officially debuted. Had Oando share price risen instead of falling like it has, would the company had changed its share price? Or perhaps if a rights issue price can be revised downwards then maybe it can be revised upwards too right? It is also important to note that Oando’s share price has traded between N16 and N15.8 since the opening of the year as such one even wonders why the share price was not adjusted when they announced they were postponing the close by two weeks. Oando is now sending out a LOUD message that RIGHTS ISSUE PRICE CAN BE CHANGED AT ANY TIME.
Technical Suspension – Late last year, Access Bank announced it had obtained approval from The Nigerian stock exchange to place its shares on technical suspension in anticipation of its proposed rights issue. Back then, the commission claimed it was in line with market rules only for SEC to issue a directive that the technical suspension be lifted. In SEC’s own words “The Commission wishes to state that it had in September 2009 directed the NSE to discontinue the practice of placing securities of listed company on technical suspension during capital raising exercise as it is not a best practice.” This basically means any company wishing to embark on a rights issue or public offering understood the risk and was expected to perform due diligence on its valuations or risk being priced out of the market of which the consequences would be a massive under subscription should the market price be much lower than the rights issue price. This is best practice as open market valuation reflects fundamentals, market intelligence, sentiments and every thing else that gives a stock its value at any given time. Oando is now questioning the SANCTITY OF THIS RULE AND HAS SHOWN THAT IT IS NOT SACROSANCT AND CAN BE EXPLOITED AND MANIPULATED.
Shareholder Confidence – There are two types of shareholders (qualified to subscribe to rights) in this matter. One is the shareholder who has decided to take up the rights despite the massive premium it was trading at suggesting that it practically made no sense picking up this rights at such price disparity. The second type of shareholders are those who acknowledged this disparity and either decided to ignore the rights completely or just scoop up more shares in the open market at a discount.
Shareholder 1 – For the first type of shareholders, Oando has now compensated them with additional shares as rather than subscribe for 1 share for every 4 held they now had 1 for every 3 held. Meaning if you had 100 shares in the previous offer structure you will be getting 25 shares as rights. However, with the restructure you will get 33 shares for every 100 owned at a price of N16.50 and not N22 representing a 25% cut in price.
Shareholder 2 – If you decided to ignore the rights and not buy in the open market then you have effectively been diluted. To avoid the dilution, you only had about 24hours to raise enough money to subscribe to your rights. For those who preferred to buy in the open market instead then you are only still ahead if you bought the rights issue at a price below N16.5. Anyone who bought above N16.5 has not just been diluted, he has also been short-changed.
Oando has now jeopardised shareholder trust in their ability to stick to the rules of engagement. SHAREHOLDERS MAY NOW WANT TO WAIT TILL THE LAST DAY TO PICK UP RIGHTS
Investors – For investors, this has set a terrible precedence in the rights issue space. It is even worse for potential offers especially in this bearish market as investors will now believe there is a loophole that companies can exploit should their rights issue price trade way higher than the current market price. Surely, SEC would give an excuse that is was doing this to safeguard shareholder value but where does it draw the line between being an umpire and being a protector? It cannot be seen to be protecting shareholders who were either innocently decided to pick up the rights at the very unrealistic price of N22 or had just blatantly goofed when they hoped Oando market price would somehow rise above the right issue price. What about the smart shareholders, who saw the error of judgement by Oando and decided to use that as an opportunity to scoop up more shares at a discount? Why has SEC suddenly turned an unfavourable umpire? The implication of this move may not be known in its entirety but for now the immediate impact will be felt by companies queuing to embark on a rights issue. Oando has once again put to question the ABILITY OF SEC TO PROPERLY REGULATE THE MARKET
For all its worth, we hope SEC rescinds this decision and put Oando to order. Market infractions MUST STOP