By: Olufemi AWOYEMI, FCA
May 04, 2006
Investment in new offers are always a controversial topic, whether it is the promoters endeavouring to justify the value they place on the company’s worth, or the indignant analyst seeking to reduce them to what he regards as more equitable proportions.
Take the case of Transnational Corporation of Nigeria Plc, known to all as Transcorp; which is set to roll out plans for an Initial Public Offering (IPO) at an unconfirmed price of N10 per share.
The question agitating the minds of analysts and investors however goes beyond the price of the offer in this case. It is not even about the third term issue which, one must admit, provides a risk quotient worth factoring into the mix.
The key issue is about the absence of or inability for investors to undertake a fundamental and technical analysis to justify an IPO with less than a year’s track record. The whole episode and the players have raised far many issues that require risk perception answers.
Transcorp Nigeria envisions itself as an African Chaebol reprising the theme of the Japanese Keiretsu. It is immediately confronted by the challenge of recreating top-down what has traditionally evolved organically.
With a corporate vision of "...creating a globally competitive industrial conglomerate, which will supply world-class products and services to local and global markets..." and "...to serve the Global Markets with premier products and services from World-Class production facilities based in Nigeria and managed by Nigerians...", it immediately assumes the role of an "economic diplomacy" tool for the Federal Government who intends to use it to promote Nigeria’s private sector abroad.
Drawing from this argument, it appears that Transcorp plc was conceived to help Nigeria cash in receiving contracts for reconstruction and rebuilding in countries where Nigeria undertakes peace-keeping operation; in the same manner the European Union have done, to promote their private sectors through award of contracts.
This position is further given credence in the address by the Chairman, Dr. (Mrs.) Ndi Okereke-Onyuike, OON during the Transcorp Initial Public Offering All-Parties meeting at the Golden Gate Hotel, Lagos on April 26, 2006 where she said “The economic reforms of the Obasanjo administration has opened up clear opportunities for the Nigerian private Sector to apply innovative and creative management techniques to an enabling environment. Transcorp was created to provide NIGERIA with the skills, the capital and the scale to compete in the global market and expand on the opportunities available to the Nigerian people.”
She goes on to add…”In the short term; rapid growth by acquisition, by participating in the Federal Government Privatisation programme by acquiring and turning around these otherwise inefficiently managed public enterprises,…….In addition, Transcorp will expand the frontiers of trade all over Africa especially with those nations that have benefited from Nigeria’s peace keeping and other intervention efforts to provide political stability in their lands”
A more interesting outlook is the mid-term goal of “expanding into industries and sectors that are otherwise the exclusive reserve of foreign companies…..”
To understand why a nationalistic rather than patriotic outlook forms the bedrock of Transcorp and why it wants Nigerians to invest in a vehicle for which their tax payments could not accomplish through the apparatus of the state; a little background on Transcorp becomes necessary.
The company, a brain child of the President with an expected share capital base of N67 billion, according to its website, was formally launched by President Olusegun Obasanjo on July 21, 2005.
Managed by a 12-man board of directors, chaired by the Director-General of the Nigeria Stock Exchange, Dr (Mrs) Ndi Okereke-Onyuike and comprising of captains of businesses like Chief Festus Odimegwu (NBL), Aliko Dangote (DANGOTE Group), Jim Ovia (ZENITH), Jacob Mayo Ajekigbe (FIRST BANK), Otunba Funso Lawal (CHARTERHOUSE Group), Femi Otedola (ZENON), Tony Elumelu (UBA), Tony Ezenna (ORANGE DRUGS), late Waziri Mohammed, Adegboyega Olulade and Nicholas Okoye, who is the Technical Secretary and Business Strategy Adviser..
President Obasanjo said that Transcorp’s goal is to rebuild the Nigerian economy with the private sector taking a leading role. This initiative was driven by the need to emulate steps taken by latest successful industrial countries of the world like China, South Korea and India, which have made serious economic impact in the world.
Transcorp is a home-grown initiative made up of local business people who have commitment, tenacity, courage, vision, patriotism exposure and the resources to see the initiative through,” he further pointed out
To set the tone of what represents its BUSINESS MODEL, the President announced an exceptional approval of a licence for the company to build 400,000 barrels per day refinery and another licence for an Independent Power Plant (IPP) to ensure the company is substantially independent in power supply.
Other concessions he granted the firm include government’s support to the firm’s cassava processing scheme and designated parcel of land for the construction of free port facility as well as continued support towards opening up markets on the African continent.
His thesis - “we are not saying that this corporation will solve all of our economic problems and put Nigeria squarely on the path to economic prosperity but it is a very good start and if well operated or managed, if is bound to serve as a strong anchor for our economic progress.
“The firm’s ability to create new jobs here in Nigeria will be almost an immediate benefit. And these will be the real jobs, which require higher skills and better pay,” he further stated.
He then urged Nigerians to support the firm by buying up the shares even as he announced in his personal capacity, the intention of his private farm - Obasanjo Farms Ltd – to invest in Transcorp. It will be interesting to know how much the president has invested and what is his shareholding in the company. Such transparency should be expected from a public company seeking listing on the exchange and parading an epitome of transparent leadership in the person of the president himself.
The chairman of the Board of Directors, Mrs Ndi Okereke-Onyuike, thereafter issued a veiled warning to all Nigerians by saying, “if you choose not to be part of it, you will not have any moral justification to complain later. It is not government-owned although government is nurturing it.”
This is the crux of the matter. A private sector led initiative nurtured by government is a new proposition to investors who have no track record or positive past experience to leverage on in making a decision.
They must simply tow the advice of the NSE Director General – the market self-regulator or Chairman of Transcorp – the Promoter. The lines just simply blur out.
The case has been made by principal officers of the exchange that:
The global market operators like the LSE and NYSE are companies in themselves for which take over bids are also made for;
That the NSE may also seek listing on the exchange itself in the near future; and
That the SEC has a supervisory role over the affairs of the market place proper.
These are all factually correct positions and examples from the J’borg stock exchange strengthens the case for a more informed appreciation of the roles and operations of the NSE and the SEC on matters such as listing, floatation and the arbiter role by commentators and analysts.
Having said that, it will be an insult on common sense to assume that SEC, with all due respect, will move against a company like Transcorp. For a company enjoying the public support, concessions and involvement of those holding the apparatus of the state, career casualties may be the reward for such an endeavour by SEC. Who therefore has the independence to act in the public interest, possible excesses of Transcorp or/and government in a situation where key regulators become players or compromised referees? Just a thought!
There is the ‘small’ matter of the Director General’s involvement and much has been said about this by all analysts during private sessions.
There seems to be an Omerta code in place which makes it a sacrilege to raise issues or comment about the hard working ‘DG’. People make so much fuss about how you would end up on the wrong side of business prosperity if you do. The encounters with Dr. (Mrs.) Ndi Okereke-Onyuike suggest a woman given to rigour in thinking and well dispose to value laden discussions. We may yet find out the paucity of this holistic conclusion from the aftermath of the contribution.
There is as yet no law that bars the Director-General from holding the enviable position of Chairman of the No. 1 corporation in Nigeria, nor is there any example known globally that makes it illegal for her to do so. If at all, it is a corporate coup by the promoters of Transcorp to have her involved in the project.
There is however a sensitive issue bothering on the increasing standards of corporate governance all over and the almost irritating issue of perception – the elimination of a benefit of doubt in the decision making capacity of the NSE. We will explore this further under the risk factors for the Transcorp project.
At the last rule check, companies requiring listing were expected to have no less that 3-5 years audited accounts for consideration. The above two issues may yet be a source of worry here as arguments have been advanced to why it is a good omen for Transcorp to become a quoted company before the end of its first year of operations.
If this happens, it will truly be an exceptional feat in rule book management. The exchange believes that the 3-5 year rule can be waived if a company has public goodwill (as if Onwuka Hi-Tech did not), has a sizeable capital base and is composed of individuals whose sum credibility and track record is easily verifiable by all.
Logic has never been so warped in execution. To put in proper context, the planned IPO for Transcorp might yet be a well thought out corporate strategy to ensure that the business and initiative survives any political permutation that may arise.
In short, once Transcorp becomes a publicly quoted company, the government of the day may have less influence over it going concern status and though may exercise its powers to execute the contingent political risk involved in the business, it will at least retain the right to chart a future for itself in other areas where the risk can be better managed.
This makes good business sense and it should be commended. What is disturbing is how they intend to achieve it. The plans have betrayed the desperation to ensure that this is done prior to nominations and election proper. It will be certainly hoped that the process for listing will not be shortened too…..
Since inception, Transcorp has been able to raise N16billion (estimated to actually be about N21billion) from its private placement which formerly closed on March 31, 2006, even though collation is still on-going.
It is targeting gross revenue of almost N14 billion in the first year of operation and N20.5 billion after five years. It’s planned IPO seeks to raise N40billion and we must wait to know what returns investors can look forward to.
THE POLITICAL RISK
Starting out to understand the Transcorp initiative requires going beyond the surface information available in the media which sometimes appear to be at one end informative and at the other, propaganda. This is to be expected. It remains however a ground breaking initiative that, on paper, has all the trappings of a mega firm acting as the Business Development Group of the Sovereign state - Nigeria. An additional apparatus of the state built outside the system along the lines of a public-private sector partnership.
For such a group to be effective, it has to function in alignment with the socio-economic and political policies of the administration at the centre.
In this case, and especially because it was nurtured by the Obasanjo government, it will be a conceptually inconsistent act for Transcorp to have other objectives other than those of the government which has taken on the role of a nurturing big brother.
This presents some scenarios that combine to define for an investor, the risks inherent in a venture such as Transcorp, viz:
A significant change in political realities and options open to the government of the day may alter projections either way;
In a country like Nigeria, not known for sustainable policies after a change of government, the possibilities of concessions being withdrawn, cancelled or changed will surely impact the viability of plans and invariably investor returns. This will increase the pressure for the company to ensure a sustenance of the status quo;
A more than normal pressure on the company and the principal promoters becomes real in an election year with all the attendant possibilities of a change of government especially when the tenure faces a constitutional closure. This increases the fear of a new government with a different idea on managing the state.
Perceptions and emotions may drown reason and sound fundamentals to affect the course of the venture.
The political risks therefore present a real challenge to such public-private sector collaboration, leading to actions and reactions that will ultimately affect and influence investors’ perceptions of the IPO.
In reviewing the developments, we worked on the scanty information available on Transcorp for which other leading analysts have adopted the age old mantra – never invest in what you do not know; by building a static model, and not surprisingly, the results did look great.
For all practical purposes, and giving the uncommon access Transcorp has to the centre, it appears that it will meet its targets which have been modestly set at N20.5billion in five years time. In terms of returns, it still pales lower than current stocks on the exchange.
When we add the variables identified above into the model for a proper risk analysis, the picture changes. The analysts quickly discover that there are possible negative outcomes.
The case for risk analysis and risk management is pretty compelling. One example used in the exercise was the financial analysis of an oil production project in a developing nation like Nigeria. A static model suggests that the project is a sure bet. However when uncertain factors such as future oil prices, changes in governance and interest rates are added, the model becomes much more interesting. We discovered how the impact of variables such as the change in government and policy direction turns a sure thing into a fiasco.
The lesson, from a management point of view, is to identify risks, understand their impact through modeling, and then implement appropriate changes to the structure of the financing to mitigate risk.
At the other extreme, and of chief concern to investors, is the outright danger in such a venture. Individuals must therefore take the decision to invest or not in the planned IPO based on their risk appetite and ability to put in place contingencies.
TRANSCORP – AT WHAT PRICE?
What is the rationale for getting businesses mixed up with politics?
Is it possible to separate existence as a corporate from political affiliations and considerations? Should there be a distinction?
It appears that the distinction is apparent for all to see but politics, veiled interests and poor management of communications has all combined to confuse the public space.
CORPORATE NIGERIA AND TRANSCORP
Corporate Nigeria and Transcorp are to all intent and purposes, two separate and distinct operations. While the former is an NGO (not-for-profit) formed way before the Obasanjo regime, the latter was founded as a profit driven business during the Obasanjo presidency.
Our position remains that if the NFP Corporate Nigeria which backed Abiola was not seen as wrong then, it should not be vilified now for observing its right to back a candidate of its choice, no matter how frayed emotions are. This is their prerogative and we must respect that. It is mere grandstanding to avoid drawing the parallel with its position in 1993 and its current realities after all; the NGO is a collection of businessmen whose primary consideration for coming together is self preservation of their going concern interest.
Transcorp on the other hand must be seen to do no more than to represent the best interest of Nigeria which it was set up to benefit. It will be wrong to expect it, giving its history and birth, to go against the government at the centre. What will however become immediately questionable will be the use of such a firm to fund the political aspirations of the government. This simply does a lot of moral/ethical damage to its true intent.
Where businesses get involved with the politics of the land and openly take positions, they open the shareholders to the vagaries of politics and the consequences of a sometimes intolerant democracy like ours. The business risk is heightened and filled with pit holes of possible reprisals and definitely, the insurance premium may have to be adjusted to accommodate possible fall-out.
Whichever way the debacle that Transcorp has found itself is resolved; nothing in the argument can remove from the high risk associated with the vision accomplishment on a sustainable basis. The business has embraced the country risk profile wholesale.
ThisDay’s April 29, 2006 story on NBL's Festus Odimegwu and the silent operators and the third term should be studied for what it reveals about the science of business than for the comic relief it sought to portray.
In the concluding part of the cover, page 66 – “He once described President Obasanjo as ‘a businessman’s dream’, because according to him, his politics are good for my country, are good for my shareholders, are good for my customers. He needs to be given a chance to complete the good work he is doing.”
What further justification do you need to link the raison d’tre for Transcorp working assiduously to ensure that an extension of the Obasanjo administration is possible?
Now, that business case cannot be faulted by even the most ill informed citizen. The concern is that of continuation of policies and in this complex world of politics in Nigeria, the man cannot be separated from the objective. To ensure continuity therefore, the driver must retain the central position for a determinable tenure.
This is tragically a failure of the system and ultimately, the achilles heel of the whole business lobby effort. Whether some or all where cajoled into joining the entity or not, it is completely outside the remit of business to play God and seek to alter or circumvent the will of the people, its consumers and source of patronage.
Two problems will most likely arise. One, the initial sound objective will be lost in the plethora of political brinksmanship that goes on and the ability to stay focused to the lofty goals set out initially will be lost.
Second, the consumers and customers are now placed in a difficult position to choose between brand loyalty and personal commitments to democracy and the possible interpretations thereof. Either way, the country is the ultimate loser. We should never get to a position that we will require the backdoor to achieve a sustainable venture as important as Transcorp (as conceived).
From a starting share price of N1 to the N6 raised during the private placement, all those involved have made good returns; all in less than a year. It thus appear, from a business perspective, that Transcorp represents a good investment based on the businesses it seeks to do in a growing economy like ours. This expected gain is however clouded in a high risk profile based on its 'real' or 'perceived' results from the political risk uniquely related to its business.
The events unfolding appear therefore to be a natural business survival strategy/response to the environment based on its risk assessment; and for which emotions run very high.
At this service platform, we have always preached that investment decisions should be taken entirely by engaging the head and not the heart. In this case, one will have to excuse investors who take the high moral ground that no money is worth the price of their democratic desires. This may be one area where the exception allowed in such rules (as the NSE/SEC also deemed fit in the listing argument) will hold sway.
The logic simply does not add up. It is made worse where people feel that the playing field is thus heavily skewed in favour of the participants or players making up the membership of Transcorp.
So what price, if at all, should an individual pay for the planned IPO?
I must have answers and I am sure you desire one as well.
Your views do matter and I request that you kindly drop a line or two to help improve the quality of discussion on the Transcorp public offer and matters arising. We will respect your privacy, once that is indicated, when publishing the array of opinion from the observing public. Do have a good weekend.