NSE listing requirements & the Dangote Cement/BCC Merger (2)

 

It is a concern to us that the issues raised in the first part of the merger commentary http://www.proshareng.com/news/12003 came up at all. The developments in the stock market have impacted on the psyche of investors to such an extent that we have all grown more pessimistic than the Nigerian character dictates – ever optimistic and hoping that tomorrow will find us in a better place.

 

For investors, this plays out through the expectation that market actions should help us recover from the downward spiral we experienced and a gradual assent would commence. This has not happened due to a myriad of reasons that cuts across all strata of the market value chain.

 

At a time when the global stocks are experiencing 4-month highs, the Nigerian market is hitting 6-month lows. This can test the most experienced investor’s confidence.

 

In this dark abyss in which we seem trapped in however appears some light which we can all march towards. The flicker of light we have seen on the horizon however will need a more constructive engagement with the market from the regulators/operators to sustain the enthusiasm of the new dawn.

 

During the week, information filtered out about certain aspects of the merger between Dangote Cement Limited and BCC Plc that impacted on this enthusiasm.

 

We have taken some time to review the NSE listing requirements – the green book http://www.proshareng.com/reports/2886 and below are our findings.

 

  1. Fees and Waivers – The issue about fees and waivers, it would appear, is at the discretion of the council. The point has been made that a part payment was made ahead of the NSE quotations committee meeting and that the balance will soon be paid.

 

  1. Granting a 24-month moratorium for compliance with the 25% free float rule must have been based on considerations and facts at the council’s disposal; yet it would seem that during such a long period after a listing by introduction, a one-directional movement for the stock appears guaranteed. The implication of this given the weight of the market capitalisation of the new entity would prove instructive.

 

  1.  
    1. It is common knowledge in the market that one of the conditions for listing and maintaining listing on the NSE is that a company that applies for listing shall make available to the general public shares representing at least 25% of the issued share capital. See Item G of the General Listing Requirementshttp://www.proshareng.com/reports/2886.
    2. Also, given the importance of this requirement, the General Undertaking executed by all listed companies provides that Council reserves the right to remove the name of a company from the Official List if “there are insufficient shares in the hands of the public“. See Section 15(a) of the General Undertaking.
    3. The free-float requirement is not there for fun; there is a fundamental market principle behind it because the pricing efficiency of the market is undermined when the free-float is too narrow. When supply is, by omission or commission, constricted the tendency is for price to go up, even if the fundamentals are at variance with the uptrend.

 

  1. Procedures for Informing the Market – Did BCC inform The Exchange (the market) of the proposed transaction before the newspaper publication and before the meeting of the Quotations Committee of The Exchange? Which stock broking firm acted for BCC? Section 1(i)(vi) of the General Undertaking clearly enjoin listed companies to inform the market of developments of this nature (a material development in the pricing of a security) – in order to avoid the establishment of a false market in the shares of the company. From published information so far on this transaction, would it be right to assume that one stock broking firm is representing the two companies in the proposed merger? Apparently, we are still to give the concept of Conflict of Interest its due place in our embracement of a new regime of regulatory oversight.

 

  1. The place of shareholders consent before approval by the regulators appears to be an oversight worth mentioning. If this had held, a resolution supporting the transaction would have still been obtained as the majority shareholders were in support of the deal and for those, who objected, they would have been bought out as is the standard practice. Not engaging the shareholders at an (E)/AGM for the transaction is a practice we should not encourage going forward.

 

  1. The transaction under consideration is actually a three-in-one deal involving the merger of two companies, delisting of one and the listing of the surviving entity. The delisting of BCC will occur automatically upon the occurrence of the merger, but the listing of Dangote Cement Plc will not occur automatically; as a non-listed company, it has to first be seen as meeting the Listing Requirements of The Exchange. This is where the 25% minimum free float requirement is important. Also, this is where the issue of Listing Fee will apply. Was the Fee computed on the basis of nominal value or market value? At market value, The Exchange would earn 0.3% in Application Processing Fee.

 

  1. Did the application in respect of this transaction reflect the various facets of the transaction? This remains a question yet unanswered.

 

The aspiration of every market is to reduce information asymmetry through rules, practices and procedures.

 

The thrust of investor protection initiative in every market therefore leans more towards favouring small investors, as opposed to our extant practice of outright protection/promotion of the interest of big investors; at the expense of the minority – as information on this otherwise welcome transaction would indicate.

 

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