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Kenya: Does the Co-op Bank IPO Still Make Sense? |
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Friday, 24 October 2008 |
So now KES6.5bn are sufficient for the bank’s plans? Co-op Robert Bunyi discusses the implications of Co-op Bank lowering its IPO share price, and with this the capital it aims to raise.
The announcement of Co-op Bank’s offer price at KES9.50 to raise about KES6.5bn instead of the previous target of KES10bn triggers a few questions. For me the most pertinent one is about the bank’s strategy. Its original requirement was KES10bn adequate to sustain the strong growth rate the bank is enjoying. Now that it is willing to accept KES3.5bn less, is it also willing to accept a slower growth rate? One would assume that the bank has had to cut back its investment plans and fit its aspirations into a tighter budget.
Second, existing shareholders may also have a number of questions for management around pricing. Why should they be willing to accept selling additional shares to outsiders at such a large discount? Admittedly the equity market is in a terrible slump and it would be almost impossible to successfully complete an IPO at the valuation benchmarks we were used to only three months ago. So why not wait? Does this not send a signal to the market that the bank is desperate for cash?
An alternative option would have been to approach the Capital Markets Authority (CMA) for an approval to issue a bond and raise about KES3bn to finance the IT plus kick start some of the long dated lending products. At a later date an IPO would then be considered if stock market conditions have improved sufficiently. Also management could opt for a combination of a private placement and public offer. In this case the private placement would have been done with local institutions and, if indicative that demand is encouraging, the bank would proceed with the public offer. Yet another option would have been to seek a strategic investor such as Equity Bank did recently, who would take all the stock now with a commitment to selling down on the Nairobi Stock Exchange (NSE) at a later date. It seems to me this was the moment to innovate rather than wheel out the same old public offer.
So now the good news: Co-op Bank is a household name and you should not underestimate the strength of the brand. Most retail investors buy the brand rather than the business case. If you do not believe me, just review the Safaricom IPO! I will not be surprised if it is fully sold. Let us also not forget that the funds raised will be invested into the business and if my cursory observations above are right, the public is probably being offered a bargain. I’ve not done any number work here but as I have mentioned previously this IPO is looking like a sweet deal. You may counter isn’t every other share in the market? Nevertheless, it does look it.
There is a fly in the ointment though: The IPO will provide existing individual shareholders a liquidity opportunity to exit the company once it is listed. Some of these guys bought the shares at KES1.00 some years back and in the over the counter market was trading at an equivalent price of KES2.00-3.00. So a market price of KES9.50 will be very attractive particularly if they are hard pressed for cash. The immediate aftermarket could be disappointing.
In laying out these observations, I have not commented about valuation, but since no one seems to care about fundamentals anymore, that need not be a bad thing. However, at all times you should base all your investment decisions on a sound valuation opinion. A decision to buy this IPO should be based only after reviewing the prospectus which should be available at the end of next week. Funny thing is that this time round I can’t seem to find even a leaked copy on the internet. Clearly we are living in strange times.
Robert Bunyi has worked for Equity Stockbrokers, Liquid Africa, Standard Bank of South Africa, Standard Investment Bank, and Renaissance Capital Kenya before setting up Mavuno Financial in June 2008. Robert can be reached on
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for more information and advice on Kenya’s stock market.
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Yes, they could issue a bond but the process takes too long. Furthermore, the cost could be relatively high with the fees & current mood.