Nairametrics| Guinness Nigeria Plc has finalized plans to seek shareholder approval to raise N40 billion via a rights issue. The company hopes to secure shareholders approval at an Extra Ordinary Meeting scheduled for the 23th of January 2017. Nairametrics will be tweeting live from the EGM.
Guinness hopes to use the amount raised to “strengthen its balance sheet” providing it with a lifeline that can help it survive through a cash flow squeeze that ensued after years of dwindling sales and recent spate of losses.
Guinness has total debt of about N33 billion out of which about $30 million (N9 billion) is owed to Diageo. Diageo, the parent company of Guinness with about 55% equity, had provided Guinness with a lifeline of $95 million to enable it survive through forex scarcity that has affected most local Nigerian companies.
According to reports, Diageo is unlikely to get Guinness to repay that debt but will instead seek for a debt conversion of its loans. Diageo last year also backed out of plans to acquire further shares in Guinness, after it made known an offer to increase its stakes to about 75%. Since then, Guinness share price has plummeted by about 33%.
Guinness reported a loss after tax of about N2 billion at the end of the financial year ended June 2016. It also reported a pre-tax loss of about N2.1 billion for the first quarter ended September 2016. The first quarter losses was mostly due to its high finance charges of about N3 billion incurred in the quarter alone.
Diageo on the money.
For Diageo, the rights issue turns out to be a better deal compared to their 2015 plans of acquiring more shares. The company had planned to acquire about 15% of the shares of Guinness for a price of N175 per share.
However, it backed off as it became clear that the economy was on its edges after foreign investors clamoured for a devaluation of the Naira, paving the way for rising inflation and a technical recession. Rather than invest via equity, Diageo pulled a smart one by providing its subsidiary with a $95 million line of credit out of which $30 million has been drawn.
If the reports reaching us is true, then the company will convert the $30 million first to Naira at a higher exchange rate than it would have obtained when it made the loan available and then will be buying at a share price of about N65 (today’s price) representing a 63% savings for Diageo.
In fact, should Diageo convert all of its $30 million @ N305 it will get about N9.15 billion or an additional 8% in equity based on a market capitalization of N103 billion.
What is in it for shareholders?
If Diageo is able to convert all of its debt into equity and also gets to take up its rights issue, then Diageo might be forced to embark on a Mandatory takeover bid that could see the share price skyrocket.
Guinness, currently a loss making company, has a vulnerable share price that is under attack from the bears. However, the bulls will not follow this stock if it were only fundamentals they were looking at. The potential of an MTO is enough reasons not to bet against this stock in the near term.