Last week, NEM Insurance Plc obtained approval from its shareholders to raise N2.64 billion in a Private Placement. This will see the company issue about 1,056,000,000 ordinary shares of 50 kobo each, at N2.50. The company did not state who will be buying the shares, neither did it state what it wants to use the money for.
The AGM was held at the Premier Hotel in Ibadan on the 20th of June, 2018. As at the time of publishing this article, details of the AGM were yet to be published on the website of the Nigerian Stock Exchange (NSE). NEM Insurance Plc currently has about 5.2b shares outstanding; thus, by our estimates, an additional 1.056 billion units on sale will dilute existing shareholders by about 14.2%.
To ensure that the private placement complies with the memorandum and articles of association of the company, the shareholders waived their pre-emptive rights under Article 43 of the company’s Articles. This has wide implications, as it means that shareholders who may have wanted to participate in the private placement will not be able to do so, as they have waived their rights.
NEM majority shareholders
According to the 2017 annual report of the company, shareholders with 5% and above of the company’s issued and fully paid shares as at 31st December, 2017 were as follows:
JEIDOC LIMITED owns about 368,445,497 units at 6.98%, while BUKSON INVESTMENT LIMITED owns about 337,054,367 or 6.38%. CAPITAL EXPRESS ASSURANCE LIMITED owns about 383,492,958 shares or 7.26%.
Chief Ede Dafinone represents Jeidoc Limited on the board of the company, while Mrs. Joy Teluwo represents Bukson Investment Limited. Mrs. Yinka Aletor represents Capital Express Assurance Company Limited.
The decision to embark on a private placement came as a surprise to Nairametrics, considering that the company’s balance sheet looked relatively robust and did not appear to be in immediate need of fresh funds. In the company’s most recent result for the period ended March 31, 2018, it had a balance sheet size of about N19.5 billion, out of which N10.5 billion is in net equity. Included in its net equity is about N4.2 billion in retained earnings.
NEM also has a relatively low share premium with a percentage of the Issued share capital of just about 9%. This often indicates that the company has not raised capital significantly higher than its par value, or has not raised at all. In fact, NEM last raised capital in 2010, when its issued share capital increased from about 4,976,922,766 to 5,280,502,913.
What is even more controversial is the fact that the company is offering the shares at N2.5, a whopping 50 kobo discount to the N3 share price that the stock is currently trading at. This has surprised some of the shareholders of the company who do not understand why the company will be seeking to sell its shares at a discount to its market value. NEM also just recently paid dividends of about N520 million, more reason why a capital raise via a private placement is rather surprising.
Suspicion of Foul Play
Some analysts thus suggest that the private placement may be tantamount to foul play and may not be in the general interest of the company. Typically, companies in need of cash defer to a rights issue to raise capital from its shareholders, and if it is a sizeable offer, they also include a public offer.
Most investors believe that a public company raising capital via private placement is indicative of distress within the company, or pressure to pay debt from bondholders. NEM does not have any of these issues, which is more reason why this private placement is surprising.
An investigation from Nairametrics also indicates that most shareholders did not receive notices of an AGM, as required by law. In fact, on inquiry, shareholders who own about 3% of the equity of the company claimed that they did not receive notices. NEM did issue a press release on the website of the Nigerian Stock Exchange stating the date and venue of the AGM. However, details of the AGM were only published on its website on the 14th of June, 2018.
Nigerian Company and Allied Matters Act, however, does not list the NSE as an official destination for notices. According to section 222 of the ACT under AGM “In addition to the notice required to be given to those entitled to receive it in accordance with the provisions of this Act, every public company shall, at least 21 days before any general meeting, advertise a notice of such meeting in at least two daily newspapers.” Initial report suggests that NEM may have published the AGM notices in some daily newspapers, but not the popular ones. Nevertheless, section 220 does specify that notices must be sent to shareholders via mail.
Word on the street suggests that the reason for the private placement may not be unconnected with a scramble to increase shareholdings in the company by a section of its majority shareholders. A few years ago, the directors of the company were surprised to find out that a new bloc of independent shareholders had secured interest in the company that cumulatively amounted to over 10% of the company. This shocked the directors of the company and has given them major concern about a possible takeover bid for the company from the inside.
Impact on share price
The latest development is likely to significantly affect the shareholdings of NEM Insurance Plc in the near term. The company’s share price has risen from N2.6 to over N3 this June alone, suggesting that a scramble is already on for the shares of this company. A scramble such as this may lead to a spike in share price in the short-term.
Information reaching Nairametrics indicate that a petition may be sent to the Securities and Exchange Commission (SEC) on this matter by some shareholders of the company. We also won’t be surprised to see a possible litigation on this development.
About 44,700 shareholders own over 70% of the shares of this company. Also, shareholders who own over 5% of the equity of NEM, own just slightly over 20% of the company. Analysts suggest that the number of shareholders affected by the decision for a private placement may make SEC move swiftly to resolve any issues that may emanate from this development.
Retail Investors have often frowned at the lack of transparency from quoted companies, particularly insurance companies in the country. Lack of investor education and participation is also partly to blame for the inability of most investors to seek their rights as shareholders of companies.