December 20, 2010, 0942hrs
On the 14th December 2010, the Nigerian Bottling Company Plc (NBC Plc) informed the market of its intention to delist from the Nigerian Stock Exchange (NSE) for ‘personal reasons’ it was expected that there existed material grounds for the stock to be placed on technical suspension (while concluding agreements for the delisting processes).
In our commentary on the implications of the NBC Plc announcement , we had wondered why the stock was not on technical suspension, raised concerns about the valuation of the exit price and drew attention to the wider implications of the delisting on the bourse. Today, we revisit the issue of non-suspension with the benefit of the impact this has had on the stock.
In NBC Plc’s proposed scheme of arrangement, compensation to be paid to the minority shareholders was set at a cash payment of N43. According to BGL equity research update - “This represents a 37% premium to the 30 day average closing price and 43% to the closing price of NBC shares on the NSE on December 13, 2010 which was N30.03 per share. Though the transaction will be consummated in the second quarter of 2011, the company says it will make further announcements on the exact timing of the transaction”.
There are few issues arising from this development, beyond the action of NBC Plc that the market should consider in the management of the NSM.
The Buy Recommendations
During the week, not a few analyst reports recommended a buy to investors. It does not take much intelligence to see what would have informed this. Most investment firms set thresholds for their portfolios and in a bear market - a certain return of 30% or more would qualify as a good deal.
This would therefore appear to be a very smart call if an investor was ‘able to buy’ the stock prior to the suspension. Investors who were lucky to buy the stock prior to its suspension will make in returns/gains - the difference between their purchase price and the offer price of N43.00k.
Price Movement Analysis
Our price movement analysis revealed that the price has been on the strong upward trend, revealing bid position, driven solely by the attractive proposed premium by the company. The share price of the company has recorded impressive price appreciation of 21.48%, with 132 percent value growth, adding 6.33% to sector value and 0.40% impact on market value for the week. (See below)
Non-Suspension of Stock creates Arbitrage
An arbitrage situation now exists in the market.
In most developed exchanges, the stock will open up at N43.00k as soon as the material stock announcement is made, to prevent any arbitrages, which it appears has been allowed to happen with the stock of NBC Plc.
Implication of Non-Suspension of Stock
What the arbitrage situation above has exposed is, in part, the crisis of regulation in the Nigerian capital market today. NBC Plc should be on Technical Suspension!
The essence of regulation in the capital market is investor protection, especially minority investors. Who are those selling NBC Plc shares since the announcement of the proposed delisting? Who are those buying?
Given the relative underdevelopment of our market, is it not possible that some of these investors are still not aware of the NBC Plc announcement or the import of the announcement? Is it not possible that some unscrupulous persons may be taking advantage of this class of investors? At the extreme, is it not deductible that buying the shares from investors at this time saves the company from paying the ‘unresolved’ exit price or reducing the amount payable?
The principal reason for placing stocks on Technical Suspension is to avoid ‘Pricing Distortion’ on the subject stock. Now, given the sustained movement in the price of NBC Plc, what becomes the effective premium on the price for minority shareholders?
It would not help to look at The Nigerian Stock Exchange for an answer; the Management of The Exchange appears to be in a quagmire on market administration issues. The stockbrokers on the other hand, those experienced in market practices and process should know better. This is unfortunate, given the subsisting mutual status of The Exchange. If the management of The Exchange does not know, how about the members of The Exchange - the Dealing Members in particular?
Understanding this State of Paralysis
There is a history to the confused state of things in the market, with regard to the issue of Technical Suspension.
Market insiders would recall that the Technical Suspension on Unity Bank during their last issue did not follow the normal process; in the sense that the stock was placed on Technical Suspension long after the application was sent to the Exchange and the market had been informed of the proposed transaction.
Market insiders equally know that the stock was placed on Technical Suspension following the intervention of SEC, which had earlier directed The Exchange to abolish the placing of stocks on Technical Suspension. In other words, the exchange did not place Unity Bank on Technical Suspension because it had earlier informed the market that the practice of placing stocks on Technical Suspension had been abolished, based on the directive of SEC. But because the advisers of Unity Bank and the bank saw the incompatibility of this hare-brain policy with the success of their issue, they appealed to SEC which had no qualms reversing itself on the matter.
Meanwhile, nothing on SEC's written Rule on Technical Suspension has changed! Neither has the NSE's.
The point is that the effective management of the stock exchange (and its market) has left The Exchange. The management of the exchange today effectively resides with the SEC.
Under this scenario, is there now a cut off date for new investors buying the stocks directly or through cross trades?
What if the stock ends up above N43 before year end given the approx. 5% daily appreciation it has been enjoying. It should attain N42.68 by end of the week at this rate. What happens then?
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