Minority shareholders and fund managers in Nigeria are up in arms over the attempt by GlaxoSmithKline (GSK) Plc, Britain’s largest pharmaceutical company, to increase its stake in its Nigerian unit GlaxoSmithKline Consumer Nigeria Plc, a company listed on the Nigerian Stock Exchange (NSE).
They are concerned that if the attempt by the parent company – GSK Plc – to restructure the capital of GSK Nigeria from the current 46.4 per cent to 75 per cent passes, it would give the British pharmaceutical giant the clout to alienate Nigerian shareholders and delist the company in the foreseeable future. They have cited the case of Coca Cola Hellenic Bottling Company S.A., which used its controlling stake in Nigerian Bottling Company (NBC) Plc to get the latter delisted from the Nigerian stock market.
A review of the transaction being pushed by GSK Plc shows that the British firm currently holds controlling interest of 46.4 per cent in GSK Nigeria through two wholly-owned subsidiaries, amounting to 443.91 million shares of 50 kobo each, while foreign fund managers and Nigerian institutional and retail investors, hold the balance of 512.79 million shares.
On November 23, 2012, having obtained the approval of the board of directors of GSK Nigeria, GSK Plc announced that it would buy 321.45 million shares of the shareholding held by Nigerians and institutional investors to increase its controlling stake to 80 per cent. In the bid for the 33.6 per cent additional equity, GSK Plc had offered a price of N48 per share. Under the proposal, GSK Plc sought to acquire additional shares of GSK Nigeria on a pro rata basis from existing shareholders through a scheme of arrangement.
However, following the insistence by the NSE that GSK Nigeria must maintain a minimum free float of 25 per cent on the bourse, GSK Plc revised its acquisition to 28.6 per cent, to give it controlling interest of 75 per cent in the Nigerian company. The offer price remained unchanged at N48 per share. Meanwhile, the Securities and Exchange Commission (SEC) only gave the nod to the transaction in June this year.
However, in the intervening period between the time the scheme of arrangement was announced and last week, the share price of GSK Nigeria had appreciated to N67 per share as at last Tuesday, on the back of speculation that the shares were worth than what was offered at the time. In other words, while the offer price of N48 per share price last November represented a premium of 28 per cent to the closing price of GSK Nigeria on November 23, 2012 and a premium of 34 per cent to the volume weighted average closing price of GSK Nigeria for the three months prior to November 23, 2012, by last Tuesday, it represented a huge discount to the opening market price of N67.
Expectedly, the market reacted negatively to the move by GSK Plc to still acquire the shares at N48 per share, resulting in a massive sell off last week of GSK Nigeria shares and the sharpest decline of its stock price in nine years to N60.70.The selloff was spurred by investors factoring in the losses expected from the gap between the current share price and the proposed buying price of N48.
Other than anticipated losses by Nigerian shareholders, a bigger concern has arisen over the shortcomings identified in the deal being offered by the British company to increase its stake. This seems to be a bigger issue than the fact that foreign shareholders are buying out Nigerian shareholders.
The problem market analysts and minority shareholders such as the Asset Management Corporation of Nigeria (AMCON) and Coronation Fund Managers, which has $40 billion in funds globally under management, with $200 million of that in Nigeria and $7 million invested in GSK Nigeria, is that the parent company GSK Plc is being allowed to vote its shares on the deal.
According to Peter Townsend of Coronation Fund Managers, in most developed markets, regulation expressly prohibits related parties from voting their shares in a transaction such as this. So in its home market in the UK, GSK Plc, as the related party, would not be allowed to vote, and the scheme would need 75 percent approval from shareholders other than GSK Plc for the scheme to pass. This best practice ensures that minority shareholders’ interests are protected and they do not get steamrolled by the majority shareholder, Townsend was quoted as stating in Business Day recently.
Mustapha Chike-Obi, CEO of AMCON, who oversaw the acquisition of shares of several companies listed on the NSE including shares of GSK Nigeria, when AMCON took over the non-performing (margin) loans from the banks, concurs and told this writer, the UK parent company has no business voting its shares on the transaction. He said, on July 23, the day the court-ordered extraordinary general meeting is expected to take place to approve the scheme of arrangement, GSK UK should abstain from voting and allow minority shareholders to vote for or against the deal. “Let the other shareholders who hold 54 per cent of the company vote. If the minority shareholders vote to approve the deal, then GSK UK can carry the day,” he said.
Another market analyst explained that in the UK, the law does not allow a majority shareholder (in this case GSK Plc) and its related parties to vote on a deal where they are the sole initiators and beneficiaries. GSK Plc, he contends, is being allowed to get away with murder in Nigeria because this is one area Nigerian laws had not contemplated. As a result, GSK Plc is taking advantage of poor regulatory oversight, combined with the primordial laws that could be exploited against minority shareholders, he pointed out. It is the same lax regulatory environment that may have led to the delisting of NBC and the increased ownership stake in Nigerian Breweries Plc by Heineken, added other market analysts.
Indeed, offshore portfolio investors have always been jittery about the lack of protection for minority shareholders in the past. Their fear has now been compounded by the fact that if the GSK deal becomes a fait accompli, it could be used as a template by other multinationals equally looking for ways to take up the lion share of profits made by their Nigerian subsidiaries.
Their fears may not be unfounded: For much of this decade, frontier economies, especially in Africa, are expected to grow faster and post better returns than the developed economies in the west and parts of Asia. Accordingly, more and more multinationals with subsidiaries in developing countries are restructuring their portfolios and looking to increase their stakes in frontier markets in order to offset flagging returns in their countries of origins.
But whilst increased foreign direct invest holds its attraction for the Nigerian market and could create more jobs, this also has the potential of squeezing out minority shareholders; will constrain the already tight liquidity in the equities market; and could trigger a massive sell off and diversion of funds to saner climes by foreign portfolio investors, who realistically have been the mainstay of Nigerian stock market for the past few years.
In order to achieve their objective by whatever means necessary, GSK Plc and its advisers – Citigroup Global Markets Limited and Chapel Hill Denham – have resorted to scaremongering by threatening to sell off the Lucozade and Ribena division, which accounts for about 51 per cent of the revenues of GSK Nigeria. GSK Plc claims GSK Nigeria is only licensed to manufacture Lucozade and Ribena and could withdraw or sell the licence if it fails to increase its stake in Nigeria. It is therefore targeting vulnerable Nigerian retail investors, comprising mostly families or estates of deceased shareholders that are not capital market savvy to sign proxy forms in favour of deal, as this would enable GSK Plc muster the 75 per cent vote required at the EGM.
But market analysts are of the view that GSK Plc is being dishonest. They have countered that the British firm had reviewed its business strategy and decided to focus on the pharmaceutical end of the business a while back. As such, the attempt by GSK Plc and its financial advisers to browbeat Nigerian shareholders into voting for the deal in order to save the Lucozade and Ribena unit is mischievous, because GSK UK’s global review of its strategy will not be influenced by the outcome of the vote on the deal. The long and short, whether Nigerian shareholders vote for the deal or not, GSK’s global strategic restructuring is already on autopilot and cannot be reversed.
What is worse is they accuse GSK Plc of not being transparent as far as the additional investment it wants to make in GSK Nigeria is concerned. They are demanding to know how much the parent company intends to pump into the Nigerian business, the timeline within which the investment will be made, and what specific aspects of the business GSK Plc intends to invest the money in.
To thwart the deal, local institutional investors under the auspices of Fund Managers Association of Nigeria (FMAN), pension operators and Nigerian shareholders’ associations, as well as AMCON are mobilising to register their protest with SEC. They are particularly incensed that SEC approved the transaction in the first place – well over six months after scheme of arrangement had been announced and the share price of GSK Nigeria had appreciated multiple-fold.
It is quite glaring that SEC has not been alive to one of its primary responsibilities of protecting investors in the capital market. Had it been more rigorous in its scrutiny of the GSK transaction, it would have known that GSK Plc was taking advantage of the loopholes inherent in the archaic Companies and Allied Matters Act (CAMA), which is long overdue for review. Given the disenchantment with the GSK deal, SEC must step up to the plate and needs to be more proactive at stemming multinational impunity.
Besides, there are alternative channels still available to GSK Plc to increase its stake in its Nigerian unit without emasculating minority shareholders. Through a rights issue or hybrid offer, GSK Plc could still achieve its desired objective. By adopting one of the options, a level playing field will be created for all stakeholders to increase, reduce or retain their shares in GSK Nigeria, and no one will feel cheated.