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‘Mareva’, How ‘Etisalat 13’ plans to checkmate Mubadala
The consortium of 13 banks that lent Etisalat Nigeria $1.2 billion have decided to seek legal action against Mubadala for abandoning its shares. The banks may have decided to pursue this option as the CBN last week asked them to stay action against the telco. Etisalat’s offer to pay $58.9 million as final settlement of its debt was also rejected by the banks.
Why go legal?
An article from the Nation suggest the banks, having realised a hostile takeover might not work as probably perceived, have now decided to use the legal option. They also considered the fact that Etisalat’s license is not transferable making a takeover extremely difficult and expensive. The banks also allege that Mubadala, the parent company of Etisalat Nigeria, has a pattern of abandoning companies when they run into trouble. Some critics of Mubadala also allege that the company had already made its money back from Nigeria over the years, via branding rights, technical fees, technological transfers and other means, making it easy for them to write down their Nigerian entity to zero. To therefore stop them from getting away with this alleged modus operandi, they opine a legal action might be the way out.
How it could work
A source quoted by The Nation also reports that the banks could explore a Mareva injunction against Mubadala. A Mareva injunction is basically a freezing injunction and is a court order preventing a defendant from transferring assets until the outcome of the associated law suit is decided. The injunction is typically used by creditors who want to stop foreign investors who default in their loans from dissipating their assets when they transfer the assets to region outside of the jurisdiction of the courts or the creditors.
In the case of Mubadala, the banks will have sought to beg the court to stop Mubadala from selling any of its assets pending determination of this case. This essentially freezes Mubadala’s assets abroad forcing them to come to the table to renegotiate. The Mareva injunction is also widely used in Nigeria and has been legal tool since the Supreme Court case of Sotiminu v. Ocean Steamship (Nig) Ltd in 199220. It is also a major tool the EFCC uses in freezing assets of suspected corrupt officials or money launderers. More on Mareva injunction
How does this favour the 13 banks?
Taking Mubadala to court may end up as a long drawn pyrrhic victory for the consortium. Legal proceedings take time, and are expensive considering the international nature of the case. The legal proceedings may also discourage any potential investors from taking a stake in the company. Being on a standby mode could lead to the company losing both market share and value, as the telecoms sector is a very dynamic one.
The diplomacy needed to solve such matters is also not available as President Buhari is currently indisposed and the Acting President sensing the fragile security situation in the country and the need to placate foreign investors, especially from Asia, may not want any more burden. Some point to the fact that at the height of MTN Nigeria’s battle with the Federal Government over a billion dollar fine imposed by the Nigerian Communications Commission (NCC), South Africa’s President Jacob Zuma had to intervene. The Nigerian government may also be unwilling to intervene, because Mubadala is a Sovereign Wealth Fund and such action could strain the relationship between both states.
Mubadala Development Company commonly known as Mubadala was established in 2002 as a National Wealth Fund owned by the government of Abu Dhabi which is part of the United Arab Emirate (UAE). The fund is active in over 30 countries, and currently owns assets worth over $100 billion.
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Buy what? Dangote vs BUA Cement
Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?
I want to review the performance of the largest quoted companies in Nigeria.
On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.
Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.
READ: Dangote Cement joins MTN in the trillion-naira club, as 2020 revenue surpassed N1 trillion
Market Capitalization
First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!
Market Price
With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.
Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0
READ: BUA Cement loses N162 billion in market value in a week
Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.
So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.
READ: Oba Otudeko’s stakes in Firstbank and Honeywell are worth over N10 billion
What else?
Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.
Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.
So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.
READ: Jumia: In search of the elusive break-even sales
Let us go a bit deeper…
When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.
Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?
READ: Three things Nigerians can learn from Warren Buffet’s latest letter
Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.
Let us score both company managers by how well they have managed the revenues and capital of the companies
| Return on Assets % | Return on Equity % | Return on Invested Capital % | EBITA Margin % | Net Margin % | Debt to Assets | Long Term Debt to Assets | |
| Dangote Cement | 14.62 | 31.21 | 26.92 | 44.04 | 24.31 | 0.24 | 0.08 |
| BUA Cement | 11.15 | 19.12 | 15.35 | 41.87 | 32.03 | 0.36 | 0.23 |
FY 2020
Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.
Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…
Do follow @FinPlanKaluAja1
This is not investment advice, this is not a recommendation to buy or sell. Past performance is not a guarantee of future performance. Speak with your adviser before investing. Equity is risky.
Blurb
Is something fishy going on at Custodian Plc?
Custodian stock hit a year high just as it announced a Convertible Loan Instrument set to be approved at its AGM.
Custodian Plc, one of the largest insurance companies in Nigeria is currently trading at a new year high of N7.10 and is up 21% year to date. Nairametrics Blurb team has in recent days noticed an upsurge in its share price especially since the company announced its AGM.
As we pen this article, about 2.9 million units have exchanged hand at a share price of N7.
The stock is included in the Pension Index and by some measure quite illiquid. It is also one of the stocks recommended in our Premium Service Stock Select Newsletter thus the need for further introspection.
READ: Buy what? GTBank vs Zenith Bank
Custodian Investment AGM
Typically, when companies announce AGMs we are keenly curious as this is where decisions that can ultimately affect shareholders (especially smaller retail investors) are approved.
In its recent filings, the company stated as follows in item 10.
That the Board of Directors of the Company be and is hereby authorised to:
(a) raise the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars), as additional capital through a convertible loan instrument;
(b) convert the loan in the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars) into shares in the Company (the “Conversion Shares”) at a conversion price, being the higher of N6 per share or the 12-month historical average daily share price of the Company derived from the Daily Official List of The Nigerian Stock Exchange (for the period ending on March 23, 2021), subject to adjustment upon the occurrence of certain adjustment events;
(c) allot the Converted Shares to the Lender upon the exercise by the Lender of its right to convert the Loan into shares in the Company, subject to applicable law; and
(d) take steps necessary or reasonably desirable to give effect to the foregoing resolutions and for effecting any transactions pursuant thereto, including the appointment of professional advisers, and the obtention of relevant regulatory approvals.
READ: Notore Chemicals is swimming in debts – company to access equity market in Q2 2021
What this means?
In simple English, the directors of Custodian are seeking the approval of its shareholders to borrow $15 million (N6.1 billion) in convertible loan instrument.
A convertible loan instrument is simply a loan that you can convert into shares if the lender so wishes. The share price for conversion are predetermined and in this case, they stated N6 per share or the 12-month historical average daily share price of the company’s stock.
If the lender does decide to convert the loans to shares at the current share price of N6 per share, it means about 1 billion shares will be offered to the lender, an equivalent of 17.4% of the total outstanding shares of the company. This loan is in effect, a potential dilution of existing shareholders of the company if it is approved at the AGM.
So why is the company seeking a convertible loan or even diluting its shareholders?
READ: Gains on quoted investment stocks rescued Custodian Investment Plc from loss in Q3 2020
Fishing around for why
Typically when a company decides to raise money via a convertible loan instrument, they are looking for lower interest rates, debt that avoids the burden of periodic repayment, and/or looking to delay when the actual equity is issued. There are also tax considerations at play but not as significant as the ones mentioned above.
Except, Custodian is looking to purchase another asset, after it bought UPDC, we do not understand why it will be looking to raise capital huge enough to dilute existing shareholders. It also did not explain why it is seeking to raise the said capital in its AGM Notice, a slight departure from the norm in cases like this.
- Custodian is also highly capitalized with a Net Asset of about N46 billion and a balance sheet size of N176.1 billion (after the acquisition of UPDC) as of 2020.
- Suffice to add that the company recently paid shareholders about N2.6 billion in dividends, making us wonder why it is seeking to dilute shareholders when it could have just ploughed that amount to its capital raising needs.
- In fact, the dividends paid in 2020 was just 21% of profits, meaning it had retained about N10 billion in profits made during the year. Again, why does it need N6.1 billion in loans?
- Custodian also has a thriving insurance business which fetched it about N58 billion in gross premium income out of which N32 billion was from non-life. Again, why does it need N6.1 billion on convertible loans?
- The company currently carries a debt of about N5.5 billion which was inherited from its acquisition of UPDC. The debt is mostly a bond issued at an interest rate of 16% per annum and due for full liquidation in 2023.
- There is no rush to pay down this debt.
READ: NPF Microfinance vs C&I Leasing: A tale of two rights offer
What then?
We are lost as to why the company is looking to raise this capital and can only now think of two reasons. Firstly, could it be the existing shareholders looking to tighten their stake in the company? Custodian’s majority shareholders are Gratitude Capital Limited and Mikeade Investments Limited with 22.48% and 15.72% respectively.
- The company CEO Oluwole Oshin represents Gratitude Capital while Business Mogul Micheal Ade (Elizade) owns Mikeade Investments Limited. Could it be either of these two investors looking to up their stakes?
- There could also be a reason for this back door approach. About 74.5% of the company is owned by just 20 shareholders so it is clear that increasing majority stake will be difficult to achieve.
- The other reason is perhaps an institutional investor looking to acquire a significant stake in the company through the backdoor. Is this plausible?
READ: Investors react to Fidelity’s bond listing, as it gains N1.74 billion
Well, these are speculations that only Cusdotian can confirm. We hope they do so as soon as possible.
