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Blurb

Nigeria’s VAT Increase: Penny-Wise, Pound Foolish

VAT is imposed on all goods and services sold in Nigeria, including imports; as stipulated under section 4 of the VAT Act, except for items that are VAT exempt.

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Zainab Ahmed, N24.9 trillion debt, FG to borrow N1.7 trillion to finance 2020 budget – Finance Minister , VAT Increment: Afrinvest exposes sharing formula of N479.7b expected revenue , Nigeria’s VAT Increase: Penny-Wise, Pound Foolish, Nigeria spends N1.11 trillion to service debt in half year 2019 , Nigeria needs $100 billion annually to fix infrastructural deficit – Finance Minister , Oil: Nigeria makes N5.4 trillion in 1 year , FG secures World Bank’s approval to borrow $3 billion , debt, FG to develop new economic development plan Vision 2040 , Nigeria’s infrastructure gap: Too little too late? , Again, Finance Minister argues that Nigeria is not in debt distress , FG defends $22.7 billion new loans from World Bank, others  , Finance Minister wants investors to curb Nigeria’s medical tourism through health investment

On Thursday, September 12, 2019, news broke that the Federal Executive Council (FEC) had approved plans to increase Value Added Tax (VAT) from 5% to 7.5%; representing a 50% increase. It is worthy of note that the current 5% VAT regime has been in existence for over 25 years (Since 1994).

Although the development is still subject to National Assembly Approval, which may take several months, it is important to analyse how this new development may impact the livelihood of majority of Nigerians; particularly the over 60% that currently live at the bottom of the pyramid.

On the contrary, VAT is imposed on all goods and services sold in Nigeria, including imports; as stipulated under section 4 of the VAT Act, except for items that are VAT exempt.

What this means for Nigerians

Every Nigerian will either directly or indirectly affected by the whopping 50% increase in VAT.

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Another implication of this is that even if you transact only in the informal sector, that is largely outside of the tax net, other items such as clothing, processed food items, shoes, etc. are VAT-able and will be charged.

The Nigerian minimum wage had been at a paltry ₦18,000 ($50 – using current exchange rate) since the year 2010, following series of negotiations with the Labour Union, under the then President, Dr. Goodluck Jonathan. Despite the devaluation of the Naira, for a little above nine (9) years, the minimum wage remained the same while other macroeconomic indices that impacted average cost of living increased.

This further negatively impacted the condition of livelihood of the average Nigerian. Below is a graph showing how the minimum wage declined and then flatlined over the last four years, despite an increase in inflation rates and naira devaluation.

[READ MORE: VAT Increment: Afrinvest exposes sharing formula of N479.7b expected revenue]

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Inflation was at single digits in 2015 when the minimum wage was at $82, whilst in 2019, the proposed $83 minimum wage will compete against double-digit inflation and higher VAT.

Following the devaluation of the Nigerian currency in 2016, the minimum wage in dollar terms dropped to $51 and has since flat-lined between 2016 to 2018. The newly approved new minimum wage of $83 (₦30,000) is a 67% increase on the current $50. Although yet to be implemented, this increment is just a dollar higher than what the average Nigerian earned in 2015 (4 years ago) yet has to compete with double-figure inflation.

VAT, on the other hand, had remained at 5% for over 25 years. In the Federal Government’s effort to increase its revenue generation and reduce its revenue to debt service ratio, it has introduced a 50% increase in its VAT to 7.5%. This, at the minimum, is a lazy approach to increase government revenue. According to the Urban-Brookings Tax Policy Center, there are at least three ways to increase government revenues:

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Modify Existing Tax Policy:

The government could scale back or eliminate some of the tax breaks/reliefs that exist in the current laws: A thorough assessment can be done to ascertain the impact of these reliefs on citizens’ willingness to pay taxes. But again, the Nigerian government will rather go the easier route.

The government could apply existing taxes more broadly:e. expand the tax net. Out of the total VAT received across the Federation, 55% of it comes from Lagos only, 20% comes from the FCT, while the balance of 25 per cent is generated from the remaining 35 states of the federation, according to the data released by the Ministry of Finance. What this means is that the VAT increase will essentially be imposed on a few states, whose citizens/residents will be made to now pay more for others. Devising new ways of increasing VAT collections in other states may also increase government revenue, rather than burdening those already paying with more taxes. It could also devise new ways of incorporating the large informal sector into the formal sector, develop some sort of tripartite agreements between federal, state governments and road transport unions to formalize the huge levies being made from those channels, which are funneled into private pockets, as against the government’s; religious organisations can be taxed on their business-related activities; several of which are done under the guise of religion to evade taxes. This has been done several times in the UK.

[READ ALSO: Private sector operators kick against FG’s plan to increase VAT]

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The government could strengthen enforcement: The former Finance Minister, Kemi Adeosun was quoted as saying that VAT compliance rate is about 12%. According to National Bureau of Statistics (NBS), the number of people in the tax net is only 13%, when compared to the labour workforce of about 80 million. Total tax revenue collected in the Federation as at 2018 in Nigeria stood at N5.3trillion ($17billion, using CBN official exchange rate of N306/$1), this is a paltry sum when compared to South Africa’s US$ 88.2 billion for the 2017/18 fiscal year, a country with a smaller economy and only a third of Nigeria’s population. It is also worthy to note that Nigeria’s VAT revenue of about N1.1trillion in 2018 is still about 1% of Nigeria’s GDP of about N120trillion, while total tax to GDP ratio is about 4%, showing that a huge gap still exists if government pursues innovative ways to increase enforcement of the current tax regime as opposed to increasing the rates.

The government could increase the tax rates that apply to selected taxes – the obviously easiest approach which our government has adopted.

Enact New Taxes

The government could also boost revenues by introducing new taxes: There are countless social issues bedevilling Nigeria that could be discouraged via new taxes, for example, gas flaring can be taxed at a flat fee of say 80% of the total value of gas flared, etc. This will increase government revenues, have zero impact on the wallet of the ordinary Nigerian, and discourage oil companies from flaring gas.

Boost Economic Activity

All things being equal, a bigger economy generates more tax revenue: the Government should be spending more time initiating policies that will drive economic activities and income levels. For example, a transformation of our power sector alone can generate thousands of jobs and change the game for investors in Nigeria. Today, the telecoms sector which was hitherto moribund, now contributes 8% to our GDP and is worth almost N10trillion. The Power sector has the potential to even do better.

Immigration reform is one way to boost economic activity: Nigeria’s immigration (naturalization) laws are amongst the most rigid in the world. The incursion of new businesses and workers into the country would expand the labor force, attract new capital; and ultimately increase tax revenue for the government. But Nigerian immigration laws make it difficult for foreigners to relocate, the bureaucracies and corruption in the Nigerian Immigration Service even make worse, the frustrations of expatriates looking to do legitimate business in Nigeria, thereby allowing the influx of unauthorized workers.

While the effort of the government to increase revenue is commendable, it is important that the government shies away from adopting lazy approaches that may further impoverish the citizens and ultimately fail to meet its objectives of revenue increase. As it stands, there is no guarantee that the benefits of increasing VAT will be worth the pain on Nigerians. One implication of the Laffer Curve (see figure 2), a principle that defines the hypothetical relationship between rates of taxation and the resulting levels of government revenue, is that reducing or increasing tax rates beyond a certain point is counter-productive for raising further tax revenue.

 

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One implication of this increase that is certain, however, is that, despite the 67% increase in minimum wage introduced by the Government (which is yet to be implemented), the average Nigerian will now have to pay 50% higher in terms of VAT on every goods or service he/she consumes.

[READ FURTHER: NECA cautions FG on 7.2% VAT, says it’s anti-minimum wage]

When this is put in context against the devaluation since 2016 and a possible rise in inflation, the already poor average Nigerian would have effectively become poorer and may further worsen our standard of living which according to UNDP is ranked 157 among 189 countries on Human Development Index.

A 50% increase in VAT in a poverty ravished economy, is one classic example of a penny-wise, pound-foolish decision.

Ayo Bankole Akintujoye is a Strategist and Business Transformation Expert with a decade of experience working with some of the world’s largest consulting firms and leading Strategy teams in Nigeria’s financial services industry. He tweets from @AyoBankole.

Samuel is an Analyst with over 5 years experience. Connect with him via his twitter handle

4 Comments

4 Comments

  1. KALU FRANCIS OKECHUKWU

    September 17, 2019 at 12:36 pm

    Brilliant analysis on VAT Increase

  2. Anonymous

    September 17, 2019 at 2:45 pm

    Minimum wage of N30,000 has been implemented. It is wage increases for those from level 4 and above that are yet to be implemented. Levels 1 – 4 have been implemented, Level 1 now gets paid N30, 000 or more…no one in the federal government gets paid less than that right now.

    • Anonymous

      September 18, 2019 at 12:55 pm

      I guess Corps members are not FG workers then.

  3. Eric

    October 10, 2019 at 12:11 pm

    Well, instead of increase VAT, government officials should start earning minimum wages too. After all, they are civil servants.

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Blurb

Analysis: Access Bank’s valuation highlights merger blues

Access Bank is valued much less than its peers and this is why.

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Access Bank, Star Lager unveil talent hunt show

From green bonds to foreign listings and a determination to plant its seeds across various nations on the African continent, Access Bank over the past few years has shown its desire to grow across its triple-bottom-line. 

On the people front, the bank has a reputation for offering arguably the best incentives to its employees in the banking sector even though last year’s plan to cut down salaries threatened to dent this reputation.

It has also introduced some of the sector’s most innovating products aimed at driving financial inclusion and protecting the bank’s market share from FinTechs. The bank has also supported small businesses through loans and financial advisory in line with the CBN’s quest to improve private sector credit.

READ: Access Bank completes acquisition of Zambian Cavmont Bank Ltd

On the environmental front, it’s spending big bucks on CSR, making a name for itself as a leader in Sustainability, and in terms of dominance, its merger with Diamond Bank and other expansionary measures have turned it into Nigeria’s largest bank and one of Africa’s top banks.

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While these moves have shed a positive light on the bank,  investors are left to play catchup as the benefits of the mergers and acquisitions are yet to result in improved return on investment for anyone who bought the shares over a year ago. 

READ: CBN, NDIC to set up bridge bank for struggling financial institutions

Its low Return on Investment (ROI)  

While Access Bank has many strides to its name, a lot more needs to be done to make it a winner with investors. Its share price has struggled to gain the same momentum achieved by its rivals in the banking sector, particularly the FUGAZ. 

Year to date 2020 Access Bank stock has performed poorly when compared to its peers. While the likes of Zenith Bank (33%), UBA (21%), Fidelity (23%), and FCMB (80%) posted double-digit returns, Access Bank fell by 16% in 2020.

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In terms of value, the market prices the stock lower when compared to its earnings, making it one of the cheapest stocks in the sector. This is buttressed by its 2.9x (as of January 22nd) price to earnings ratio, one of the lowest in the sector.

READ: The Nigerian insurance sector; repositioning for efficiency

In the same vein, the Tier 1 bank also has a lower dividend yield compared to its contemporaries and has not been able to breach its 52-week high of N10.90. One reason for this is that investors are wary of the bank’s loan book mostly inherited from its merger with Diamond Bank. Investors will rather go with some Tier 2 banks that have better upward trends in price appreciation than getting stuck with low valuation multiples. 

READ: CBN to increase loans to agricultural sector to 10% of total bank credit

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Access Bank merger blues

As mentioned, one Achilles heel to its valuation problems could be its aggressive expansion strategy, driven by acquisitions. Since its acquisition of Diamond Bank, its valuation has plummeted piling on paper losses for investors who have held the stock since then.

Access Bank is currently valued at N325.2 billion in market capitalization less than half of its N679 billion suggesting a price to book ratio of 0.47x.

While being large provides the benefits of economies of scale, it needs to be nimble and focussed to milk the opportunities provided by the synergies

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READ; Africa to spend $9 billion on Covid-19 vaccine, access to supply is big problem

The bank recognizes this challenge, recently holding an investor call where it explained its move towards a HoldCo structure.

Access Bank will maintain four core subsidiaries under the holding company. They are Access Bank Group – focussed on commercial banking services, Payment Business – its mobile money and payment services business, Lending & Agency Banking – microfinance and microlending services, and Insurance.

Its efforts in restructuring into a HoldCo structure as well as expansions to other African regions – from Kenya to South Africa, is expected to further enhance its overall returns,  and perhaps drive up valuations. 

READ: Access Bank will no longer accept cheques with logo of defunct Diamond Bank

Fundamental analysis of recent financials 

Access Bank has recorded positive strides in terms of its fundamentals.  In its latest 9 months results, net interest income decreased by 6.6% year-on-year, but profits increased by 15% to N102.3 billion. 

Access Bank also implements one of the most aggressive recoveries of bad loans in the banking sector pulling in N38.9 billion in recovery in 2019 and N24.7 billion in the first 9 months of this year. These recoveries filter into the bottom line and bolster confidence about its ability to confront its challenges and win.

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How Access Bank got Japaul to pay up N37 billion loan that had gone bad

Brute force, Courts, quid quo pro are hallmarks of Access Bank’s debt recovery schemes.

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Access Bank, Scam Alert: Access Bank issues warning to customers over fraudulent acts , Director, West Africa region, IE, Onyekachi Eke, Access Bank lists N30 billion bonds on NSE , Access Bank, Zenith Bank Plc, Access Bank Plc and United Bank for Africa Plc, Zenith Bank Plc, Access Bank Plc and United Bank for Africa Plc, A new BVN guideline to curb e-fraud is coming soon - CBN announces , Access Bank donates 66 laptops to children in underserved communities, Access Bank postpones closed period for 2019 Year-End financial statement, Access Bank dispels rumour about its CEO being arrested, Access Bank set to establish subsidiary in Cameroon after acquiring Kenyan bank, Access Bank finally acquires Kenyan bank, Transnational Bank Plc, Herbert Wigwe: We are clamping down on malaria with the Malaria-To-Zero Initiative, Access Bank to list N15 billion green bond on Luxembourg Stock Exchange 

In 2018 when Access Bank took over Diamond Bank, in what is the largest merger in Nigeria’s banking history, they knew it was not a match made in heaven like their PR agencies will make you believe.

In merging with Diamond Bank and taking over their juicy assets, they had also taken over the lemons that had for years bedeviled the bank who had pioneered mobile banking applications well ahead of its time.

When Access Bank merged with Diamond Bank, the latter had total loans and advances of N787.8 billion out of which N219.9 billion in loans were impaired. Oil and gas-related loans made up a significant chunk of the loans and were estimated at about N302.6 billion, most of them distressed.

READ: Access Bank will no longer accept cheques with logo of defunct Diamond Bank

Included in the oil and gas loans was a $66.4 million in loans owed to the bank by Japaul Oil and Maritime, as they were referred to at the time. The loans had gone bad accumulating unpaid interest of about $11.2 million. By the time Access Bank took over the loans, Japaul agreed to a restructuring rolling over both the principal and interest.

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This is typical of most Nigerian companies burdened with debts they cannot pay. To avoid being run over by the bank, the debtors will negotiate a restructuring, extending the loans by one to three years and if lucky, reducing the interest rates. In return, the bank books new fees (which are often paid in advance of the restructuring) and then gets to avoid huge provisioning mandated by the central bank.

READ: Over 1 million people took loans from banks below 20% interest rate in 1 year- CBN

It is often a ‘win-win’ situation that essentially kicks the can down the road until, like in the case of Diamond Bank, the chicken comes home to roost. But Access Bank is not new to slugging it out with debtors, particularly those who do not pay up. Upon takeover in 2019, Herbert Wigwe, the CEO of Access Bank announced that his bank was going to go after Diamond Bank debtors. In an interview in 2019 he maintained that “we recovered N2.2 billion bad debt in the year under review. Access Bank will intensify effort to ensure that it recovers the debt owed to Diamond Bank. We will go out for Diamond Bank’ debtors and if they are not ready to redeem their debt we will publish their names in the newspapers.”

In 2019, Access Bank swooped on Japaul Plc seeking repayment of their Diamond Bank loans which was now about N37 billion. The bank took over Japaul’s trading assets and integral to the going concern status of the company. Before now, Japaul made money rendering marine services, dredging, mining and construction mostly for the oil and gas companies.

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READ: Access Bank vs. Seplat: Of subterfuge and corporate brutality

But business has been bad for years now leading the company into net accumulated losses of over N50 billion as of 2018. For the 5 years leading to 2018, the company posted back to back losses with revenues going from N5.3 billion in 2015 to about N85.8 million in 2019. External loans had also ballooned from about N18.8 billion to about N38.8 billion. Its share price had also fallen to about 20 kobo per share by the end of 2019. It was nearing bankruptcy and something had to give.

They began a court battle with Access Bank over the loans and the threat of a liquidation eventually settling for a deal. Sources inform Nairametrics that Access Bank is one of the most aggressive banks in the business when it comes to playing dirty with debtors. Unlike Diamond Bank, Access Bank is ready to battle in the courts and is ready to deploy any legal means necessary to recover their loans even if their actions are viewed as uncanny.

READ: Former bankers who stole from Diamond Bank (Access Bank) get jail terms 

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Recently, the bank obtained a Mareva injunction sealing the offices and taking over the assets of Seplat due to a related party loan owed by the latter’s Chairman, ABC Orjiakor. Just like Japaul, the loans owed by ABC Orjiakor were also obtained from Diamond Bank. According to sources, when Access Bank swoops in for their loan recoveries, they deploy all tactics in the books to ensure all or most parts of the loans are recovered from chronic debtors.

Eventually, Access Bank and Japaul agreed to settle the matter outside the court. In exchange for repaying the N38 billion loan, Access Bank settled for a repayment of N30.9 billion. The deal involves Access Bank taking over two of Japaul’ s Dredgers (12& 13) for N5 billion and a Barge (Beau Geste) for N25.9 billion. Japaul also gave up its land in exchange for working capital of N1.5 billion from the bank.

READ: Access Bank recover N14 billion in bad loans after merger with Diamond Bank

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In return, Japaul gets to clean up its balance sheet erasing what is left of its debt, booking a profit of about N40 billion and wiping off its negative equity of N35.5 billion. However, in one fell swoop. From negative equity of N35.5 billion, the company’s net assets are now N4.69 billion. A win-win for everyone.

We are not exactly sure what Access Bank plans to do with dredgers and barges it took over from Japaul. Interestingly, in the deal, Japaul also gets to lease back the two dredgers for a period of 6 years from Access Bank for a sum of N1 billion paid annually from 2021 – 2026. Japaul got a one-year moratorium on repayment expiring in December 2020.

READ: Nigeria, other African oil-producing countries will lose $1tn oil revenue in 20 years – PWC

Japaul has since changed its name to Japaul Gold and Ventures citing the dwindling oil and gas sector for its reasons. The company believes gold mining and technology are the future and is seeking to raise N25 billion in equity to pursue this course. Its share price has ostensibly risen by 150% since the turn of the new year, the best performing on the stock exchange.

For Access Bank, aggressively going after bad loans have paid off immensely. In 2019 the bank recovered N38.9 billion in bad loans barely a year after taking over Diamond Bank. In the first 9 months of 2019, a total of N24.7 billion was captured in bad debts recovered. It is a strategy that is working and there is no betting against Access Bank doubling down on aggressive recovery this year.

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Champion Breweries, Raysun deal highlights disclosure shortcomings

Is Heineken taking over Champions Brewery?

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This brewer keeps struggling to win as Nigeria’s beer war rages on

Champion Breweries Plc informed the Nigerian Stock Exchange, last week, via a press release that an insider, Raysun, had purchased about 1.9 billion shares at a price of N2.6 per share.

The disclosure was part of the stock exchange’s requirement that listed companies must reveal deals made by insiders of the company for the benefit of shareholders and the investor community.

That’s about how far the press release went. It did not reveal why Raysun was purchasing? Who they purchased the shares from and why the deal is being consummated? In terms of corporate disclosure, this was a dud.

READ: Analysis: Japaul, Ardova, Champion Breweries; What is behind the deals?

Raysun is the largest shareholder and majority owner of Champions Breweries. Raysun is also an entity owned by Heineken, the majority shareholder in Nigeria Breweries Plc – the largest brewer in the country. Thus, Heineken is an indirect shareholder of Champions Breweries.

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These relationships give this deal enough scrutiny to warrant a better disclosure starting from the actual purchase of shares revealed in the press release.

Here are some contexts;

Champion Breweries shares breakdown

  • Champions Breweries has a total of 7.82 million shares outstanding at the time of this purchase
  • Raysun held about 60.4% shares in Champions Breweries according to disclosure in its 2019 annual report.
  • Asset Management Nominees and Akwa Ibom Investment Corporation own 12.3% and 10% respectively. The rest of its shareholders own about 17.3% or 1,351,954 units.
  • At the current share price of N1.12, Champion Breweries is valued at N10.57 billion by the market.
  • However, Raysun’s purchase of 1.9 billion shares at N2.6 per share (valued at N4.9 billion, almost half of the current market capitalization), now values the company at about N20.3 billion.

READ: Court threatens to sell Ecobank and Union Bank branches

Where did the shares come from? This is a vital question and here is why.

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Going by the number of shares they bought last week (24% of equity), they only could have been able to purchase that many shares by buying up all the shares owned by the Asset Nominees (12.3%), all the shares owned by Akwa Ibom Investment Corporation (10%) and another 3% from other regular shareholders.

It could also be that either or both Asset Nominees and Akwa Ibom IC sold part of their shares and then they made up the rest by purchasing some from the market. Why is Heineken, through Raysun, acquiring so many shares? Is there a takeover deal in the offing? Do they plan to merge Champions Breweries with Nigeria Breweries or still keep it as a standalone company? Will Champions Brewery cease to exist if there is a merger or will they delist following this massive acquisition of the shares of their subsidiary?

READ: Champion Breweries gains 32.35% in a week, following Heineken’s indirect acquisition of its shares

The speculation is palpable.

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This is what happens when listed companies refuse to properly disclose transactions involving mega share purchases of this nature. How does a majority shareholder go from 60.4% of shares to 84% and an announcement is not made explaining or clarifying who sold and if this is a takeover bid.

But investors seem not to mind at the moment, if the momentum of the share price is anything to go by. A 57% year to date gain is a testament to this. It appears investors expect a mandatory takeover announcement to be made anytime soon and are scrambling for the shares ahead of any announcement.

READ: Resort savings raises N4.3 billion, as Camey and Rock acquire majority shares  

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Unfortunately, this is not how markets should work anywhere, and the sooner it stops the better. The Nigerian Stock Exchange has made massive progress with compliance to disclosure requirements and we believe strongly that they will at some point bring Champion Breweries to order and have them disclose all the requisite information about this transaction. Better late than never.

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