Nigerian Rescued Banks: Good or bad investments?
In 2009, eight out of the twenty three listed banks on the Nigerian stock exchange were discovered to be under-capitalized and efforts were quickly made by the new central bank governor to prevent the financial sector from collapsing. Funds were injected into five of them and two were given time to recapitalize. Wema bank and Unity bank have been able to raise funds to meet up with the deadline, although Wema bank took an extra thirty days to get this done.
Since the announcement of AMCON starting their operations of mopping up bad loans from the banks, some of the rescued banks have been on a bullish run as speculators took advantage of the good news. There is the belief that the purchase of these bad loans in exchange for bonds that are yet to be issued will restore the negative asset base of these companies back into the positive territory. In my previous blog post I have been able to show that this is not entirely true and the banks will still need to be recapitalized, hence the continuous interest shown by investors, both foreign and local, in these banks.
The question of whether holding the stocks of these banks at this time pertains to current shareholders. Is it worthwhile to hold these stocks? I really don't know but my belief is that the risk is not worth taking if there are better deals out there. I believe that current shareholders are probably going to get ripped off but they may not know how that will happen. I will use a simple example to illustrate how this scenario will most likely play out.
It is already in the public domain that FCMB is the preferred bidder for Finbank. FCMB has several options in taking over Finbank:
1. Recapitalize Finbank by injecting funds and own a majority stake
2. Make a tender offer at a premium to market price
3. Exchange FCMB shares for Finbank
4. A combination of two or more of the above listed
As things currently stand, Finbank is a distressed company and may likely go the way of a distressed sale. I believe that the first scenario is likely to play out and this is where current shareholders will be ripped off.
Finbank has 16.7b shares. Assume that the stock is selling at N1.00, that means the market capitalization stands at N16.7b. The bank has a negative net asset of about N120b. FCMB can decide to inject N20b into the bank and own 80% of it and then offer to absorb the negative balance sheet into their own books. Where do current shareholders stand? The bank will end up with a market cap of N36.7b with current shareholders holding 46% of the market cap while shares are issued in enough numbers for FCMB to hold 80% of the bank. For this to happen, that means more shares will be issued for FCMB up to the tune of 66.8b units. At the end of this transaction Finbank will have 83.5b shares and a share reconstruction will be done to reduce the outstanding shares to a reasonable level.
What this means is that FCMB may bring only about 50% of market cap and own 80% of the bank. Is this possible? Yes, it is because it is a distressed sale and FCMB, as the preferred bidder holds the aces.