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Share Buy-Back: Is this an Option for the NCM Recovery?


November 25, 2011

Share buy-back; which is usually considered a sign that the company's management is positive about the future for the going concern is the act of re-purchasing of its own shares by the company (under commonly acceptable capital market rules) from the marketplace. Its effect is to reduce the number of shares in issue, giving each shareholder a larger percentage in the ownership of the corporation.

Share buy-back can be carried out either through a Tender Offer or through the use of an Open Market option.  

Companies usually buy back shares either to increase the value of shares still available (thus reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

Nevertheless, companies would initiate a buy-back plan - in order to put unused cash to use, raising earnings per share, increasing internal control of the company and obtaining stock for employee stock option plans or pension plans.

Recently, Warren Buffet made an astonishing statement that his Berkshire Hathaway Company has plans to repurchase it shares. Speculation later arose as to why Warren Buffet had chosen to endorse a share buyback of his multinational conglomerate holding company shares for the first time in living memory. Buffet, in response, provided an insight, on several occasions, into why Berkshire Hathaway had taken the option. In his words “the company will never buy back shares merely to bolster the share price or to stop a fall in the price. Undoubtedly, the shares makes for a good buy having dropped nearly 24 percent since late February 2011. Moreover, given the huge amount of cash the conglomerate holds, repurchasing shares might be one of the best methods of redeploying all that reward. In recent interview on CNBC, Buffet said that the company had already commenced the buy-back, though he did not reveal the number of shares repurchased. It is interesting to note here that this is a complete reversal from Buffet’s hitherto stance on the whole idea of share buy-backs.

Despite the fact that he (Buffet) has maintained that stock buy-backs are too insignificant to make any real difference to shareholders and are mostly used by executives to prop up the value of their stocks which are linked to their compensation plans; he however conceded that a buy-back can be initiated only if a company has excess cash beyond it’s near term requirements and its stock price is quoting at a discount to its intrinsic value.

Relating this development to happenings in the Nigerian Capital Market, one of the measures listed by the Federal Government to save the Nigerian Capital Market from total collapse during the financial crisis was the option of a “share buy-back”.

Some History
Share buy-back was introduced in Nigeria in 2008 by The Securities & Exchange Commission. However, no quoted firm took advantage of the rule due to limiting factors prevalent in the applicable law guiding the process.

In order to encourage companies to implement share-back whenever they deemed it necessary, the NSE has had to issue its own rules, hoping to ultimately jump start the process.

In response to this, the Securities and Exchange Commission (SEC) recently approved the rulesthat are expected to guide share buy-back in the country’s capital market and administered by the NSE.

Informed operators reason that it may not be a good decision for; and indeed a very difficult decision for quoted companies in Nigeria toe the line of the Buffet logic of ‘valuation creation’ because, ultimately, the growth prospect in Nigeria in the longer term is far more attractive than that in the United States – as curious as it may sound.

Firstly, for some evidence on this, we turn to two separate but official reports from Nigeria and the United States of America. While the Nigerian economy, measured by the real Gross Domestic Product (GDP) on an aggregate basis grew by 7.40% in Q3 2011 based on data released by the National Bureau of Statistics (NBS) the revised figures from the US Commerce Department showed that its gross domestic product grew at an annual pace of two per cent in Q3 2011, down from the previous estimate of 2.5 per cent.

Secondly, looking at the current tight liquidity scenario, Nigerian Companies may possibly be better off keeping sufficient funds for future financial requirements. It will be a great relief to keep surplus cash in case the need arises to explore inorganic growth opportunities.

Thirdly, the Monetary Policy Committee (MPC) has raised the benchmark interest rate six times this year to 12%. This has had the effect of tightening up the economy; a consequence of the trade-off between the less impacting interest increase over the more volatile exchange rate release due to our import dependence on critical products ( wheat, rice, fish and petrol – all accounting for about 40% of the foreign exchange requirements/demand from the CBN). 

Furthermore, looking at the financial status of most quoted companies in Nigeria; very few of them have excess Cash and Bank Book Balances. Based on their current results, four (4) quoted companies have excess cash that is above N100bn with banks topping the listing; eighteen (18) companies have excess cash of N100 to N10bn, one hundred and thirty-six companies have excess cash that is below N10bn while three (3) companies posted negative cash and bank balances. See Table Below


Click Here To Download Full Table

Quoted companies with the biggest share(s) in issue listed on the NSE includes Unity Bank Plc with 33.67bn shares, First Bank Nig Plc which has 32.63bn shares, UBA Plc has 32.33bn shares and Zenith Bank Plc with 31.39bn shares.

These firms, dominated by banks, may however be in a position to engage in a share buy back in order to add more value to their shares. See Table Below


Thus, while we can completely understand Buffett's change of stance with regard to share buy-back, we also welcome the initiative by NSE to deepen the market at this critical period through the option of a share buy-back. 

As a matter of integrity, we had argued against this position in the 2009 NCM Report mainly because of the significant size of the shares outstanding for companies trading below N5.00 primarily based on the twin problem of the cash outflow involved and the apathy of shareholders based on the initial entry price.

Based on the evidence provided above, we believe that it is too early for Nigerian companies to consider such options without adequate reasoning and justification – and most certainly believe that it is not an option for all listed companies on the bourse. 

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