By James Anyanzwa

The rush by firms to debut at the Nairobi Securities Exchange through initial public offerings (IPOs) is losing steam.

Instead most companies now opt to list by a way of introduction thus avoiding exorbitant costs associated with IPOs and the rigorous due diligence process.

In the last three years, only one firm — British American Investment Company — has listed at the bourse through an IPO compared to seven between 2006 and 2008. “It is because of a declining market that we have not had many IPOs,” said James Wangunyu, Standard Investment Bank executive chairman.

In 2006, KenGen IPO was over-subscribed by 337 per cent, opening the floodgates for other listings before IPOs lost appeal in 2008.

ScanGroup was oversubscribed by 520 per cent, Eveready East Africa (800 per cent), Kenya Re (334 per cent), AccessKenya (300 per cent) and Safaricom (382 per cent).

However, the last two IPOs — Co-operative Bank (2008) and British American (2011) — ended in under-subscription.

However, Wangunyu is upbeat that the bourse is on the recovery path.

“The market has been bearish in the last three years but is now recovering and we are seeing a number of firms considering IPOs,” he said.

The performance of Co-operative Bank and British American IPOs was blamed on foreign investors pulling out of emerging markets due to the global financial crisis, and retail investors who had borrowed from banks to invest in shares fled the market after burning their fingers.

Easy exit

“The market has not been favourable for IPOs. A company can’t plan an IPO if it is not sure it will be a success,” said Geoffrey Odundo, Kingdom Securities managing director.

An introduction entails listing of shares already issued.

According to Odundo, listing by way of introduction gives the share price discovery and also gives existing shareholders an opportunity to exit and new investors to buy the stock.

“Once listed it is easier to do an IPO due to fewer compliance conditions,” he says.

Last year’s British American offer, the first IPO in three years, failed to excite the market and registered a massive under-subscription.

British American Investment Company, the holding company of British-American Insurance Company (Kenya) Ltd, British-American Asset Managers Ltd and Britam Insurance Company (Uganda) Ltd received approval from the Capital Markets Authority (CMA) to raise the funds by floating 650 million new ordinary shares.

But investors bought only 60 per cent of the shares with foreign investors shunning the stock.

The company was seeking Sh5.85 billion to fund expansion in east Africa, including South Sudan, but only raised Sh3.5 billion due to risk aversion in global markets given the eurozone crisis and a sluggish US economy.

“I think what has happened is to do with market conditions and cost of funds,” says George Bodo, lead analyst at Callstreet Research and Analytics Company.

“Over the last four years the economy has not been doing well and this means investors have been short of disposable income to invest in stocks.”

According to Bodo, an IPO is a very hectic venture, so some companies prefer to list by introduction, which offers plenty of incentives.

“I think we will see a lot of listing by introduction going forward. Listing by introduction means you are not introducing new shares but you want to unlock the value of the company.”

Among benefits of listing include arising the company’s public profile and preferential corporate tax treatment.

The Government has over the years granted no less than 30 fiscal and tax incentives to issuers and investors through the capital markets.

In his Budget speech in 2008, the minister for Finance extended these benefits to companies listing through introduction.

Tax incentives

Bread manufacturing firm, DPL Festive, is among firms that suspended their IPO while CIC Insurance chose to list by introduction. DPL Festive founding brothers, Jaynish and Dipesh Shah, featured prominently in stock market news during the second half of 2009, with intentions of listing their firm as they sought to raise Sh500 million to finance expansion plans.

“IPOs are determined by owners of capital. Since 2008 we have not had good performance at the bourse and in a bearish market the valuation of shares won’t be good,” said John Kirimi, executive director at Sterling Capital Ltd, adding that during a bear market it is better to list by way of introduction because prices for IPOs are very low.”

“A bear run period is a wrong time to do an IPO,” he told Business Weekly.

Wangunyu said listing by introduction helps a firm unlock its value and gives existing shareholders an avenue for exit without raising additional capital.

“The process is less vigorous in terms of disclosure requirements, and creates pricing mechanisms for the existing shares,” he says

Listing by way of introduction is appropriate when the securities to be listed are already or will be listed or traded on another stock exchange.

Some companies feel more comfortable asking their shareholders to pump in more capital through rights issues to support their growth and expansion programmes.

June 2012, retail clothing firm Deacons plans to list 30 million shares on the bourse by way of introduction subject to regulatory approvals.

Equity Bank, CfC Insurance Holdings and TransCentury Company have listed by way of introduction at the Nairobi bourse while CMA has approved CIC Insurance Group to list by introduction 2,178,195,820 ordinary shares of Sh1 each on the main investment market segment.

CIC Insurance chose to list by introduction as a persistent bear run at the NSE made the IPO route unviable.

Bear run

According to the Economic Survey 2012, last year was a bad one for investors with both the stock and the bond markets registering declines on their primary and secondary markets.

Investments at the bourse were eroded, with the market capitalisation registering a 25.6 per cent dip to Sh868 billion meaning investors at the stock market lost 25 per cent of the value of their investments.

Stock prices tumbled and this led to investors shying away from the bourse, while seeking alternative investment opportunities.

NSE ‘s 12-month market turnover fell by 28.2 per cent to Sh79 billion last year from Sh110 billion in 2010, while the NSE 20 share index dropped 27.7 per cent to 3,205 points in December 2011.


 

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