Finweek English Edition - - INVESTMENT -

There has been a lot of chat­ter that African Bank share­hold­ers are not yet to­tally down and out. While this is true, don’t ex­pect to profit from the col­lapse of the bank. Sim­ply put, if shares in a com­pany you own go bust, you can­not ex­pect to make a profit from that fact. How­ever, it seems cer­tain that the ‘good’ bank side of African Bank will re­turn to the mar­ket, with ex­ist­ing share­hold­ers be­ing able to par­take in the list­ing. That means that they will be able to buy new ‘good’ bank shares. In other words, they will have to put more money in.

As a sim­ple cal­cu­la­tion: African Bank has a neg­a­tive net as­set value (hence it went bust), but let’s say with the cash raised from list­ing it ends up with a R10bn book value (net as­set value). As­sum­ing there are 1.5bn shares (cur­rent shares in is­sue from African Bank), they would likely be is­sued at a price of say R6.67. In other words, share­hold­ers would have to pay for their new shares and this would re­sult in a price-to-book value of 1 (R10bn mar­ket cap un­der­pinned by R10bn net as­set value). A price to book of 1 times is cheap, ex­cept of course share­hold­ers have ac­tu­ally al­ready paid for their shares and if they now were to pay an av­er­age of R6.67 (and that num­ber is on the low side, the real num­ber is likely dou­ble that), then the effective price-to-book value is 2 times, and that makes the ‘good’ bank ex­pen­sive. The bot­tom line is that cur­rent share­hold­ers have lost money.

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