Why Guinness, Unilever Shareholders Should Exercise their Rights
Nigerian shareholders of Guinness Nigeria Plc and Unilever Nigeria must do everything possible to participate fully in the ongoing Rights Issues to avoid losing their stakes in the companies, writes Goddy Egene
Guinness Nigeria Plc and Unilever Nigeria Plc are two leading firms listed on the Nigerian Stock Exchange (NSE). Why Guinness is a leading brewing firm, Unilever controls significant share in the food and personal care products segment of the Nigerian market. Both have foreign investors as majority shareholders. Diageo is the majority shareholder in Guinness; Unilever United Kingdom (UK) is the majority investor in Unilever Nigeria. Again, both companies have been suffering from a similar problem of increasing finance costs over the years due to their reliance on bank borrowings to fund their operations. This reliance on debts borrowings has over the years impacted their profitability and the level of returns to shareholders in form of dividends.
However, in order to reduce the cost of finance, both companies have decided to inject fresh equity capital from existing shareholders through Rights Issues.
Guinness Nigeria
Guinness Nigeria Plc is offering 684,494,631 ordinary shares of 50 kobo each at N58 per share to existing shareholders to raise about N39.70 billion. The offer opened on Monday, July 24 and will close on August 30, 2017. Stanbic IBTC Capital Limited is the issuing house for the rights issue. To many market operators, the equity capital injection is overdue for Guinness considering the fact the high cost of finance that stemmed from reliance on debt financing pushed the company into a loss position.
In the third quarter ended March 30, 2017, Guinness posted a loss of N2.6 billion as against a profit of N900 million in the corresponding period of 2016.
In fact, as at half year ended December 31, 2016, Guinness Nigeria’s net debt to equity ratio stood at 103.9 per cent, indicating that the company was highly leveraged and needed urgent equity injection to reduce the erosion of its earnings through high interest charges.
Hence, analysts had said the decision to go for a rights issue would go a long way in repositioning the firm for better future performance.
Speaking on the rights issue, Managing Director/Chief Executive Officer of Guinness Nigeria, Mr. Peter Ndegwa said it would deleverage the company’s balance sheet and reduce finance costs.
He noted that the company obtained a loan from Diageo in 2016 to manage foreign exchange related obligations, saying that between 2015 and 2016 obtained loan facilities from various financial institutions to fund working capital requirements and business expansion operations.
Ndegwa said: “This rights issue will allow the company to deliver on its strategic objectives and give all our shareholders a unique opportunity to increase their shareholding in the company. Our expectation is that funds raised will help mitigate the impact of increasing finance costs, optimise our balance sheet and improve the company’s financial flexibility.”
Already the chairman of the company, Mr. Babatunde Savage, has told shareholders why they should exercise their rights fully.
“The company’s unique competitive advantage in terms of total beverage alcohol portfolio, consistent strong support from Diageo, world class local production assets, scalable beer operating model and strong corporate governance standards within its board and management, sets it apart as an excellent investment opportunity,” Savage said.
According to him, the devaluation of the Nigerian currency, foreign exchange scarcity and volatility, higher interest rates, a decline in real gross domestic product(GDP), weak financial markets and increase in cost of imported raw materials impacted on the company’s performance, over recent years.
“We have embarked on a number of restructur- ing initiatives in order to return the company to profitability. For example we have increased sourcing of our raw materials locally, deepened our partnerships with local distributors, reduced prices to grow volumes and gain market share, enhanced operational efficiencies and broadened our product portfolio to meet consumer preferences amongst others. We believe the capital injection rights issue will help the company to deliver on our strategic objectives and give all shareholders a unique opportunity to increase their shareholding,” he stated.
Over the past few years, consumers have considerably shifted to value brands due to weakening economic conditions.
Ndegwa said Guinness, which has traditionally operated in the premium/mainstream beer and malts markets has responded by repositioning and expanding its portfolio and has become the only truly total beverage alcohol player in the country offering products right across the board from spirits, to beer, ready-to-drink and non-alcoholic beverages.
“In addition the company plans to fully participate in the premium and mainstream spirits segments, leveraging its recent acquisition of rights to Diageo’s international premium spirits brands and mainstream spirits such as Johnnie Walker and McDowells. The company also intends to enhance its presence in the lager, beer and ready-to-drink markets with plans to launch new products designed specifically for the Nigerian market,” he said.
Unilever Nigeria
Unilever is shopping for N58.851 billion from existing shareholders. The company is offering 1.962 billion ordinary shares of 50 kobo per share at N30 per share. The offer opened on July 31 and will close September 8, 2017.
The MD/CEO of Unilever Nigeria Plc, Mr. Yaw Nsarkoh has called on shareholders and capital market stakeholders to support the ongoing rights issue that will position the company to deliver better value going forward.
According to him, through this rights issue, the company will be able to reinforce its financial flexibility to support its growth initiative, while giving shareholders an opportunity to consolidate their shareholding position.
“The rights issue is part of Unilever Nigeria’s long term strategic intent to strengthen the company’s capital base by deleveraging its balance sheet, support its working capital needs and position the company to exploit value accretive opportunities,” Nsarkoh said.
He explained that the net proceeds would help the company repay outstanding foreign currency denominated liabilities, purchase additional raw materials required for Unilever’s products and to meet other working capital requirements in order to build long term value for all stakeholders.
In the same vein, the Chairman, Unilever Nigeria Plc, His Royal Majesty Nnaemeka Achebe, said rights issue represents a milestone event in Unilever Nigeria’s history as it marks the company’s first follow-on equity offering since its listing in 1973.
“The rights issue reiterates our confidence in Unilever Nigeria’s robust future and commitment to building a more enduring business in Nigeria. We acknowledge with deep appreciation the unwavering support we have received from our stakeholders and shareholders even in trying times which has enabled us deliver positive results. We urge all shareholders to support the company’s objective by participating in the rights issue to ensure the company obtains the flexibility to attain its growth objectives,” he said.
Unilever posted profit before tax of N5.044 billion for the half year ended June 30, 2017, compared with N1.487 billion in 2016, showing a growth of 239 per cent. Similarly, while PAT stood at N3.676 billion, up by 236 per cent from N1.093 billion in 2016.
The company had reduced its finance cost by 40 per cent to N1.7 billion from N2.8 billion, following lower interest paid on loan obtained from Unilever Finance International AG.
Although the company increased its loans and borrowings by 176 per cent from N7.426 billion to N20.501 billion with N15 billion from Unilever Finance International, the interest rate was 6.45 per cent, compared with N5 billion borrowed locally that attracted 13.9 per cent. Part of the proceeds of the rights issue would be used to repay loan.
Need for minority shareholders to take up their rights
There are compelling reasons why the minority shareholders local should not to miss out in the rights issues of both companies. Firstly, both issues offer the investors an opportunity to retain their holdings in the firms at prices lower than current market prices. For instance, at an offer price of N58, shareholders of Guinness are exercising their rights N27 lower than the market price of N85, as at last Friday. Similarly, Unilever’s offer price of N30 per share is N15.49 lower than its market price of N45.49 as at last Friday.
Secondly, failure on the part of the Nigerian shareholders to take up their rights would offer the foreign majority investors an opportunity to increase their stake and possibly take over the companies 100 per cent in the nearest future.
In Guinness, Diageo, is already controlling 54.32 per cent and the company has signified its readiness to exercise its full rights. Similarly, Unilever Overseas Holdings has 60.06 per cent shareholding in Unilever Nigeria, while Stanbic Nominees has 10.43 per cent. The remaining 29.51 per cent is held by other minority shareholders. Any failure of the minority shareholders not to take up their rights portends high risk for them.
Although the Finance Director of Unilever, Mrs. Adesola Sotunde-Peters has assured that Unilever UK, would pay for its rights and not convert its loans into equity, market analysts said the minority shareholders should ensure they also take up their rights.
“As you may know, once a majority shareholder holds 60 per cent stake in a company, that majority shareholder has the privilege to buy out the minority shareholders. And given the current holdings of foreign investors in Guinness and Unilever, any failure on the part of the minority shareholders will jeopardise their stake in the companies,” a market operator said.