The recent spate of rights issues and forex loans being converted into equity by multinational companies could leave minority shareholders roasted. Nigerian multinationals such as Unilever, PZ, GSK, Nestle, Guinness and Nigerian Breweries, have at one time or the other received bailouts in the form of shareholder loans from their companies.
How this happened?
A drop in crude oil prices and production volumes in 2016 led to the depreciation of the Naira against other currencies. This lead to restrictions being placed in the foreign exchange market by the Central Bank of Nigeria (CBN) and difficulties in accessing foreign exchange. Parent companies of these firms had to step in by giving them loans and concessionary rates, effectively bailing them out. But as the saying goes, nothing goes for nothing. Local firms are compensating for these bailouts by offering shares in exchange and sadly, at the expense of minority shareholder.
Why exchange shares for loans?
With the depreciation of the Naira over the last two years, local subsidiaries of these companies have faced increasing difficulty repaying these loans. Some have taken on huge provisioning arising from exchange rate losses while others are currently negotiating with parent companies for even more bailouts. These firms are currently in a fix, as Naira provisions for these loans have doubled, so paying back will be difficult. Case in point is the current tussle between Etisalat Nigeria and a consortium of Nigerian banks. Sales have been flat or declined due to the tough macroeconomic climate, hence the right issues. Other examples of bailouts by parent companies involve the likes of Unilever, Nestle, Guinness, GSK. Unilever, recently announced its own rights issue on the back of a similar bailout deal.
For the parent companies, conversion gives them an opportunity to increase their stakes in these firms. Previous efforts have been met with stiff resistance by minority shareholders.
History on the Nigerian Stock Exchange (NSE) has shown that once multinational firms have a majority stake in a company, delisting from the floor usually follows as was seen with Nigerian Bottling Company (NBC). Many of these companies find listing on the NSE a big hassle due to numerous fees they must pay and fines that come with late submission of results. Delisting also gives them greater control of the firm as they face less scrutiny and reduced pressure to constantly pay out profits as dividends.
The depreciation means they will have a bigger stake, as they have more Naira on their hands. The harsh economic climate may also prevent many minority shareholders from taking up their rights. While some of the companies like Guinness Nigeria say the intended funds are being raised for capital projects and working capital, the monies have already been spent on raw materials, so no new business is being done.
Shareholders need to be more vigilant when it comes to firms taking foreign loans especially from their parent companies. These companies also need to look inwards for domestic sources for their raw materials and apply hedging and other derivatives to their foreign exchange obligations.