Nigerian Stock Market. Beware of foreign investors(2)
May 2nd, 2007 Ogbuotobo Chuks || chuks@stockmarketnigeria.com
By Ogbuotobo Chuks
The Gist
Now, if you read or hear of an investment of say N20 billion by a syndicate or consortium of foreign banks in XYZ bank plc, try to find out if the money invested was in form of “debt” or “equity”.
If it is invested in form of debt, it means that XYZ plc is going to convert some of its yearly profits into servicing that particular loan for a period of time. Well, this on its own is not bad, but it becomes bad for shareholders when the debt profile of a company is on the high side. This reduces the amount to be paid as dividends on one hand or it reduces the amount the company has in its reserves in the medium to long term. This definitely would lead to stock depreciation over time.
On the other hand, if the instrument is in the form of “equity”, it means that the shareholding structure of the company would be diluted as time goes by.
This means that assuming the company was 100% owned by Nigerians, ( board members, staff and investors alike), it ceases to be so upon such an investment. The company investing takes up a certain percentage of ownership in turn for the money invested.
Most times, such an investment takes the form of preference stocks for some reasons. When a company becomes diluted, it means large outstanding shares and most likely small dividends if profitability cannot be increased to match such change.
A vivid example
In April of 2007, a consortium of five international financial institutions invested N20.25 billion in Intercontinental Bank plc. The money was meant for implementation of strategic growth plans which in the long run implies more profits.
Also, the money was invested in the form of convertible preferred equity. Convertible preferred equity simply means stocks that have the right to be converted to common stock.
Assuming they are converted at the rate of N20.00, this implies that the bank has an additional 1 billion units of shares. Hmm…
Conclusion
Both debt and equity investment are good but check to make sure that the company is making good profits and also taking deliberate efforts to reduce the debt profile. Always do your mathematics before reacting to company news.
Think and Act…
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