Saturday, May 25, 2019 / 10:00PM / By Proshare Research / Image Credit Header: EcoGraphics
"Your thoughts carry you wherever you want to go. Weak thoughts don’t have the energy to carry you far!"
- Israelmore Ayivor
A significant milestone was achieved on May 16, 2019 when MTN Nigeria Plc (a part of the MTN Group headquartered in South Africa), Africa's leading cellular telecommunications company listed 20.4bn units of its ordinary shares on the floor of the Nigerian Stock Exchange (NSE). It was exactly eighteen (18) years ago, specifically May 16, 2001 that MTN became the first GSM network after paying $285m for one of the four GSM licenses issued by the Nigerian Communications Commission (NCC) in January 2001. It launched its full operations in August 2001.
The road to this listing has been a long journey and thought the road finally taken to achieve this speaks to the challenges around efforts to establish a nexus between economic sector players and the market, the arrival was welcomed by all stakeholders in the capital market.
In the first day of trading, MTN’s stock price rose by 10% from the listed price of N90 to a day one post-listing price of N99 after a few minutes of ‘trading’. This appeared to ordinarily reflect a consequence of the momentum built up around the stock. This show of strong market momentum continued on the next day with the equity gaining a further 10% leading to a second day closing price of N108 per share.
Over the weekend however, word on the street had it that brokers in the market were concerned about the speed at which the stock was gaining daily value against the background of the ‘slim’ volume of shares available for trading. By the night of Sunday May 19, 2019; the NSE caused to be sent, a Public Notice addressing head-on what it understood to be misplaced concerns from the brokers community which having filtered into the public space required a response. NSE’s notice represented that the accusations about the market being rigged and that MTN shares were either being hoarded to promote a higher share price or that the Exchange was complicit in the refusal of existing shareholders of the company releasing larger volumes for trading; was inaccurate.
NSE represented in the aforementioned release published by Proshare that:
“Since the listing of MTN Nigeria on Thursday, May 16, 2019, a total of 105,301,759 shares valued at N12,231,997,316 have traded in three (3) days. These trades were carried out by ten (10) Dealing Member Firms in 134 cross deals/negotiated deals.”
The Exchange went on to explain that, “According to the Rulebook of The Exchange, when a Dealing Member or Authorized Clerk has an order to buy and an order to sell the same security at the same price, the Dealing Member or Authorized Clerk may “cross” those orders at a price at or within The Exchange’s best bid or offer. A variant of this is the negotiated deal, which describes a situation where a cross deal is executed between two Dealing Member Firms at a price which may be within The Exchange’s best bid or offer or with the approval of The Exchange, outside the best bid or offer”
Obviously worried about the extent to which most of the transactions on the stock were done by way of cross deals, the Exchange further noted in its release that, “Because cross deals involve clients of the same Dealing Member Firm on both sides of a trade, significant issues have been raised that Dealing Members who have not been involved in the cross deals have been unable to trade on behalf of their clients. The Exchange is not unconcerned about this state of affairs. Indeed, Council members of The Exchange urged brokers to discuss with their clients about possible sales of shares.”
This response by the Exchange appeared to confirm the concerns ab initio.
For some, it was condescending, as it suggested that the Exchange was not in a position to ensure that the listing company complied with the norms and accepted market etiquette of selling some shares on the floor of the Exchange at the point of listing as was the case with the previous listing by introduction; a case in point being that of DANGCEM on October 26, 2010. Other stakeholders described the admittance as an error of omission, rather than commission given the expediency of the listing. Either way, whatever blind spots about and around the potential price distortion that could occur, if the company decided not to offer a ‘feel good’ number of stocks to satisfy investor’s short-term expectations and long-term aspirations has manifested and it is important we approach the fall-out from a market learning perspective.
On the third day post-listing, Monday May 20, 2019; the stock had gained a further 9.96% to close at N119.75 per share in apparent disregard to the Exchange’s concern. MTN Plc also found it necessary to issue a public statement on the same day, to address concerns as it affected the company and its listing.
By Tuesday May 21, 2019 when the market gained another 9.98%, Proshare’s Market and Intelligence Unit was inundated with enquiries from stakeholders seeking for information, explanation and insight over what was clearly an agitation over practices or conduct that suggested an overreach or stretching of the rules of engagement on MTN’s share price. The key message discerned was the threat of a breach of sensible market thresholds with MTN’s daily average price increases by just under the 10% limit, resulting in a 60% capital gain within four (4) days of trading.
It was against this background that Proshare decided to seek answers to the underlying questions with a view to gaining an understanding of the facts, gather evidence and provide clarity to its audiences. The analyst team was expanded and mandated to contact a network of financial market professionals and entities involved in the listing value chain to obtain clarity about MTN’s share price movement(s), the lack of traded liquidity in the stock resulting in perceived abnormality in daily price movements and the notion of a contrived scarcity in a play to game the market.
This market memorandum reflects our modest effort to meet the above objectives.
A foundational truism established was the motivation behind the listing by introduction. As trite as it may be, it is pertinent to establish that MTN’s earliest inclination (preference) was to list its shares on the NSE by way of an Initial Public Offering (IPO) which would have ensured that the company was priced within a valuation model that would have choked off excess demand and allowed for adequate market liquidity. The decision to adopt the LBI and expeditious listing are better explained by the company and the approving authorities; even as we postulate on the linkages in section 1.4 of the market memorandum.
That the prices moderated on Thursday offers a sign that reason and a return to normalcy may be on its way. The indicators are that MTN’s share price will settle between N150 and N180 per share as the stock’s daily price increase fell from 9.8% on Monday to 2.87% on Thursday 23, May 2019; as at the time of signing off on this report. The slowing down of price growth suggests recalibration of the balance of power between sellers and buyers; but more importantly, a cessation of a situation where only one house transferred the shares from nominee account(s) to the beneficial owners and invariably kept increasing the price without selling a single unit to the market.
Buyers are now less enthusiastic to buy at the higher prices while sellers continue to assume that they still command a dominant negotiating position. By Thursday, the market began to see the first signs of open trading (in contrast to the earlier closed cross deals). The pay-off play between both buyers and sellers are expected to establish a temporary equilibrium that will hold until the company announces a date for its IPO.
Nominal Share Price of 2kobo
Not a few brokers expressed concerns about the nominal price of N0.02kobo for MTN. It is our contention that the rules of The Exchange allows companies to list at nominal values below the previous minimum of 50 kobo per share. That said, MTN chose to list at a nominal market value of 2kobo per share, even though the nominal value prior to listing and as contained in the company’s listing memorandum was 100kobo per share. The communication of this would have addressed the curiosity of the market even as a re-read of the rules offered clarity for the professionals and market enthusiasts interested in due process.
Late Announcement of Listing Date
Similar to the observation above, concerns and dissatisfaction with the timing of the listing, premised on the claim that a one-day notification of the listing of an offer of MTN’s magnitude was inadequate; appears factually incorrect. The brokers’ network had been intimated about the listing of MTN stocks on the NSE, at least a week before the Thursday 16, May 2019 date.
If there was a point of convergence we were able to establish, it was that MTN and its advisers were unable to make firm statements on a specific listing date much earlier, due to a lot of back-and-forth between the company and the Exchange over a precise date. This would appear not to be an uncommon development experienced by companies wishing to list on The Exchange; neither should it have appeared unusual to brokers.
That said, there is a clear need for The Exchange to develop a smoother approach to diarizing market listings to provide investors with early guidance on market action. The absence of clarity over listing date and lateness in updating brokers on the nature and terms of public offers is unhelpful to building a culture of market transparency and efficiency for which the NSE appears committed to.
The need for faster response to specific market changes and general market developments (that is price sensitive) has been established in this case. Both SEC and the NSE would have to include in its annual review mechanism, a process for reviewing market developments as a basis for rule and internal governance practice modifications. No clearer incentive is needed than the example provided in this case study where a nominee account manager crossed tens of millions of units of a listed stock over a four day period amongst existing nominee account holders at a 10% upward price adjustment on a daily basis resulting in upward price movements.
Fair practice and transparent governance demands that such transaction execution ought to have been administered as follows:
By not transferring the shares in the nominee accounts of existing shareholders to a Registrar and the CSCS; it invariably created a trafficking of MTN shares in an opaque market arrangement that forced up the price of the company’s shares on the basis of shadowy considerations.
Stretching The Rules of Listing Creatively
Whilst it would appear no rule (without prejudice) was broken by the Nominee Account manager/financial adviser, the spirit of openness and fairness was compromised. Though MTN was not required to offer existing shares to the general public from its listing by way of introduction, it was quite a bold move for the Nominee/financial adviser to begin trading in the stock and crossing shares among existing shareholders while moving the market price of the company up by 10% on a daily basis, whilst the shares were not with the registrars/CSCS. This created an obvious situation of price discrimination against prospective shareholders who did not have access to the shares at the time of listing but would have to pay an oligopolistic market price when the shares become available to a wider community of buyers and sellers.
The nuanced determination of share pricing within this off-market context needs to be addressed by both the SEC and the NSE to avoid a repeat of a situation that deliberately discriminates amongst different groups of shareholders. The problem is not that of legality but that of equity, fairness and good governance. The act (either by omission or commission) of allowing some investors get a head start in earning capital gains within a supposedly fair market context goes against the spirit, if not the letter of the stock market’s central ethos of providing a platform for the free competitive trade in assets, where price is determined by the dynamics of unfettered demand and supply. A carefully controlled and choreographed process of price bulging cannot be seen as consistent with an NSE-monitored market.
It has been argued and evidence advanced, that an option, open to MTN that should have been explored by the financial advisers was the creation of additional shares by increasing the authorised share capital to the extent of free float it intend to make available on listing date. This, they contend was achievable during the timeline established for the listing.
Understanding Cross Deals and MTN’s Share Price Increases
The major concern over the lack of market liquidity in MTN stocks may have blown over since Thursday as a reduced price momentum appears to be leading to a market correction of MTN’s enterprise value. The issue of major cross deals on the company’s shares over the past week still leaves unanswered significant questions on why the market price of the stock continued to rise despite the fact that most of the transactions were completed off-market? Which stocks were cleared-for-trading on these days? Who precisely was selling the stocks?
The latter question is particularly important because it speaks to the transparency of the share pricing process since it is evident that over the past week; existing shareholders of MTN have not been in the mood to offer r shares for sale. Answering the question of where the market suddenly found shares for offer on Thursday after buying entities complained bitterly about the lack supply side liquidity for the stock, would be a good starting point?
This goes to the heart of the problem about market governance and transparency within the context of the latent capacity of well-heeled investors to exploit the weaknesses within the existing listing architecture to make huge value gains at the expense of the rest of the investing public. Cross deals normally do not influence share price movement on the Exchange (caveat: except they are in excess of 10,000 units as has been the case with MTN) as they are usually ‘sweetheart’ arrangements between shareholders that are clients of the same stock brokerage firm. The cross deals done by the Telecom giant’s Nominee managers over the past week has brought to the fore the need for the apex capital market regulator and the NSE to insist on companies coming to the bourse for listing to demonstrate good faith and commitment to fair practices by transferring nominee shares to a Registrar in preparation for trading.
We believe there exist another opportunity for this upon the resolution of issues between the AGF and MTN over an alleged $2bn charge. The company would be free to list by way of an IPO and this should in turn create opportunities for wider public ownership.
Section 1 of this report reviews the listing process of MTN and regulators response to alleged market manipulation. While no case of outright wrong-doing or illicit manipulation was established, the manner in which MTN’s Nominee account manager/financial adviser was allowed to cross several million units of the company’s shares at incremental rates of 10% per day for four days was a strong pull at the limits of elasticity of the understanding and concept of share price manipulation. After reviewing the extraneous factors around the listing, the report concluded on the need for a review of the listing conditions that refer to listing companies providing free float of 20% or a market value of N40bn on the date of listing. This rule appears not to reflect the size of a premium board listing. In the case of MTN for example, the entity listed 20.4bn units of shares on the floor of the Exchange at N90 per share which meant it was very easy to meet the N40bn rule, just as most entities contemplating and qualified for listing on the Premium Board will equally easily scale the N40bn threshold. This invariably means that there is no incentive to comply with the 20% free float rule. This situation would create the challenge of an early spike in listed share prices of new stocks listed on the Premium Board if not addressed. Finally, the message/lessons deduced here points to the need to reduce the shelf-life of NSE’s rules in a dynamic environment where smart investors and players have the capacity, resources and willingness to continually test the robustness and pliability of the rules as evidenced in this case.
Section 2 of the report takes a look at the pace at which the regulators seem to lag market operators in revising market action, enabling unusual market conduct that unsettles traders and investors alike. The section takes a detour by looking at how adversarial investor action supported by financial advisers could destabilize the time-worn niceties of public listing, thereby, creating a classic Nash equilibrium problem or what some people prefer to call a prisoners dilemma. The section also takes a look at the consequence of the delay in the resolution of the company’s problem with the Attorney General of the Federation (AGF) and its sundry contingent liabilities and their likely effect on future share pricing.
Section 3 takes a deeper dive into the issue of free floats and how it may likely impact fair market pricing. The ability of a company to list on the NSE without creating a framework for establishing a free market determined price for the shares breaks notional rules of market transparency and price fairness. This is not a statement about whether the practice of listing without tradable security is legal or not, but it is a conceptual review of the spirit of trading in assets claimed to be public. It would appear to be a grave anomaly for shares to be publicly listed but unavailable for trading. This is regardless of whether the shares came to the floor by way of introduction or public offer. The concern is that assets on a market must be priced within a framework that open enough and can be understood by the average investor based on publicly available information. The information asymmetry that characterized the listing of MTN shares could have been better, with the benefit of hindsight. This is not a revisionist approach but a 20/20 reflection that offers an opportunity for market regulators to tweak existing market rules to ensure that a similar situation of market rule stretching does not reoccur.
Section4 looks at the forward earning potential of the company and reviews Q1 financials with a view to understanding the primary corporate growth points and adjusted free cash flows that will likely affect the company’s future market price. The section also looks at the company’s business strategy, competitive market space, accounting practice and its recent activity timelines that could impact performance.
Section 5 concludes the report and summarizes the outcome of Proshare’s investigation into the listing of the company and events that have served as postscripts to the offer. It makes a few bold statements about investor protection, regulator proactivity and the elevation of market governance practices. The report is complemented by relevant references and links for further reading.
We hope you find the report useful. Thank you.
Analyst(s) and CMO Comments/Reports Pre-Listing
1. MTN Nigeria IPO Teaser – Listing and Precursory Information - Jun 01, 2018
3. MTN - A case study for market-supporting institutions – Temitope Oshikoya – Nov 03, 2015
Third Parties Comments Posts Listing
4. Ferdi Moolman: The CEO who painted Lagos Bourse - Businessday.ng - May 21, 2019
Analyst(s) and CMO Comments Posting Listing
8. VIDEO: Capital Market Analyst, Rotimi Fakoyejo, Speaks On Shares Manipulation Allegation Against MTN – Arise News – May 21, 2019
9. MTN Nigeria’s Listing by Introduction: What the True Picture is – Afrinvest – May 21, 2019
10. Bullish Post Listing Market Reaction on MTNN Stock –Anchoria AM Research - May 17, 2019
Related News on Nominal Price & Transfers
11. NSE Rule on Nominal Transfers Takes Effect – Jul 12, 2018
13. Click here to Download Full PDF on Par Value Rule - Nov 06, 2017
15. Click here to Download Full PDF on Interpretative Guidance - Nov 06, 2017
Related News on MTN
17. NSE Clarifies Concerns on MTN Nigeria's Premium Board Listing – May 21, 2019
18. MTN Listing Memorandum – (PDF) – May 16, 2019
19. VIDEO: Highlights of MTN Nigeria Listing At NSE – May 16, 2019
21. A Fool’s Guide to the MTN Nigeria’s 2019 Public Listing - May 16, 2019
24. MTNN Q1 2019 Analyst Presentation – May 13, 2019
26. MTN VS AGF: Court Rejects AGF Preliminary Objection – May 07, 2019
28. MTN Announces Conversion From A Private Company To A PLC - Apr 24, 2019
29. MTN to List On the NSE Before End of H1, 2019 - Mar 14, 2019
34. MTN Nigeria Sues FGN and AGF For N3billion – Nov 09, 2018
37. MTN Nigeria, Banks and CBN Action – An Update and Initial ... - Sept 01, 2018
38. MTN Ghana Successfully Completes Its Initial Public Offer – Aug 31, 2018
39. MTN Replies Nigeria's CBN – You Approved The Funds Repatriated Aug 30, 2018
41. Stanbic IBTC Notifies of Regulatory Fine in Relation to MTN – Aug 30, 2018
42. CBN Clamps Down on Four Banks; Writes MTN to Refund $8bn – Aug 29, 2018
43. MTN Nigeria – Interim Financials For H1 2018 - Aug 14, 2018
45. MTN Ghana Launches Mobile Money Based IPO - Jun 10, 2018
46. MTN sues NCC over N780 billion fine - Premium Times Nigeria - Dec 18, 2015
47. MTN Group share price drops by 10% - Proshare – Jun 17, 2005
Related News on Exchange Rules
48. NSE, SEC Streamline Listing Process to Encourage More Listings – May 23, 2019
50. NSE Notifies of SEC Approval of Rules of The Exchange - May 13, 2019
52. NSE Launches X-Bot to Enhance Market Participation – Dec 28, 2018
53. NSE Proposes Rule for Listing of Green Bonds on The Exchange – Oct 04, 2018
54. NSE Reviews Equities Market Structure to Improve Liquidity and Participation – Jun 25, 2018
55. New Rules on Suspension of Trading in Listed Securities – Matters Arising – May 22, 2018
57. NSE Proposes Rules for Price Stabilization of Securities; Calls For Comments – Mar 22, 2018
59. NSE Proposes Amendments to Dealing Members Rule(s) 7.4 and 7.5 – Nov 16, 2018
60. NSE Releases Sustainability Disclosure Guidelines – Nov 16, 2018
61. NSE Proposed Rules on Free Float, REITs and Listing on the Growth Board – Jun 01, 2019
63. NSE Calls for Comments and Drafting of Rules on the Derivatives Market – Jan 02, 2018
64. NSE Pricing Methodology - The New Par Value Rule And You – Nov 09, 2017
66. NSE Issues Notification of Effective Dates of New Rules for Dealing Members – Oct 25, 2017
68. NSE Proposes Amendments to Rules 15.31, 15.32 & 17.13 of the NSE Rulebook - Feb 19, 2016
69. NSE Introduces The Rulebook 2015 – Dec 31, 2015
71. New Rules on Demutualization of Securities Exchanges in Nigeria Proposed – Apr 12, 2015
Related News on Free Floats
73. Level of Compliance and Free Float Deficiencies on NSE – Jun 07, 2016
74. Free Float Deficiencies: CHELLARAMS Yet to Comply as due date elapse – Mar 03, 2015
75. DANGCEM, UBN and 9 Others Still Have Free Float Deficiencies – Jul 02, 2015
76. NSE Seeks to Amend Rules on Free Float, Filing of Accounts and 3 Others – Feb 26, 2015
78. NSE Grants Waivers to DANGCEM, UBN and 4 Others on Free Float Deficiencies – Sept 22, 2014
79. NSE Lists DANGCEM, UBN and WEMABANK as firms with Free Float Deficiencies – Apr 02, 2014
80. Aluminum Extrusion Industries Plc Joins List of Companies With Free ... – Oct 09, 2014
82. Listing Rules: NSE confirms list of firms with Free Float Deficiency - Oct 02, 2012