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Transcorp - A Questionable IPO(AllAfrica.com English Via Thomson Dialog NewsEdge) Lagos, Dec 04, 2006 (This Day/All Africa Global Media via COMTEX) --Trans National Corporation Plc (Transcorp) just got listed on the Nigerian Stock Exchange, preparatory to an initial public offer (IPO) of the company's shares in the weeks ahead. The marketing and media blitz embarked upon by Transcorp heralding its listing penultimate Thursday is already starting to pay off. In a space of slightly over a week its share price has gained several percentage points moving from N6.00 per share to N8.42 kobo by the close of trading last Friday. By implication, if demand for Transcorp's shares remains on the ascendancy its shares will most likely be sold at a tidy premium to the investing public during the IPO. The bullish run enjoyed by the company's shares is being propelled by institutional investors' misplaced confidence in Transcorp's ability to match and exceed the markets expectations in the foreseeable future. Institutional investors presently buying up the shares are also probably buoyed by the track record of Transcorp's founders. In Nigeria, we call them men (and one woman) of timber and calibre. Men with a demonstrable track record of owning and managing successful businesses - financial gurus and business mavens; the accolades could go on and on. Unbeknownst to the public though is the fact that some of these men will be cashing in on shares that were allotted to them but were never paid for during Transcorp's private placement a year ago. There's no better way to perpetuate a scam than this idea of reaping where one did not sow. Its ownership aside, Transcorp has leveraged heavily on the political goodwill of the Federal Government and in particular President Olusegun Obasanjo who owns shares through a blind trust in the company (it is uncertain if Obasanjo's interests in Transcorp will be disposed off during the IPO). Through this it has successfully acquired controlling interest in the largest hotel in Nigeria, in NITEL and its mobile subsidiary Mtel, as well being granted concessions to operate an oil mining lease or two and build an oil refinery in Lagos. All this it accomplished in 18 months of operations. Prior to that the company had no balance sheet, nor operational track record - it simply did not exist (although Transcorp was incorporated in November 2004, it did not commence operations till May 2005). Yet within its brief period of existence and without the underlying fundamentals, the company has managed to qualify for its shares to be listed on the stock exchange for subsequent sale to the public in a few weeks time. This in many ways is reminiscent of the dotcom boom and crash in the US and parts of Europe in the 1990s. To achieve this unprecedented feat, at least by Nigerian standards, the rules for listing requirements have obviously been set aside. The Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange whose Director General coincidentally is also the Chairperson of Transcorp have both granted Transcorp a plethora of waivers (does anyone smell a conflict of interest?). In other words, the company did not need strong financials, nor did it need to be profitable or present its accounts for the last five years prior to making forays into the capital market (my apologies, it had none to present in the first instance). Its ownership and government backing was all it required to scale the hurdles imposed on other companies. Obviously Trancorp must have been emboldened by the fact that it undertook its private placement last year without recourse to SEC. That was a deviation from the norm, since all private placements in excess of N25 million must be approved by SEC after meeting certain requirements. But in Transcorp's case the company obtained a Presidential waiver exempting it from the rules, then proceeded with the private placement, following which it only sent the necessary documentation to SEC for a retroactive approval in October this year. There are indications that Transcorp was compelled to get SEC's approval due to pressure from the Economic and Financial Crimes Commission (EFCC). To be fair to Transcorp, the company did nonetheless prepare and present a prospectus to investors which must have been approved by an emasculated SEC before getting listed. However, its prospectus unlike that of other companies will most certainly be devoid of audited accounts (once again, my apologies. It has none to boast of). Investors should count themselves lucky if the company even prepared and include its management accounts up till September 2006. But at the very minimum, the prospectus must have been suffused with five-year projections showing positive cash flows and future earnings. If Transcorp does not resort to creative accounting and off balance sheet book keeping, its projections should reveal that the company inspite of its purported successful private placement is heavily leveraged. It borrowed heavily to acquire the NICON Hilton Hotel from the Federal Government and did likewise during its acquisition of 51% of the equity in NITEL. And even though borrowings from the banks for the Hilton acquisition have been repaid from funds raised during the private placement, Transcorp simply cannot transfer the debt from NITEL's acquisitions because it is still partly owned by another shareholder (the Government). As such the liabilities will have to be retained in Transcorp's books and must show up in the prospectus. The major snag is Transcorp has always been and continues to be economical with the truth (incidentally the 90-day deadline for payment of an additional $250 million for 24% of NITEL by Transcorp lapsed on November 29. Aren't we owed some explanation?). It also lacks the imagination expected of a company supposedly owned by financial whiz kids to raise money through other means other than raising funds from the capital market. The company's strategy is to convince the investing public that it will become cash flow positive on the back of future earnings or dividends that will accrue from its assets made up presently of NITEL, the Hilton, a crude oil mining lease and a yet to be constructed refinery. But the big flaw in this strategy is that except for the Hilton, none of Transcorp's acquisitions will begin to generate the kind of income it needs for some years to come. NITEL for one is at the moment a non-performing asset that pretty much like its parent company, Transcorp is laden with a huge debt overhang and will therefore not start to yield dividends for several years. Moreover, owing to the huge capital injections needed to make telecom companies profitable, historically telecom assets cannot be depended upon to generate dividends quickly enough. Transcorp's best bet if it has the foresight will be to spin off NITEL's fixed wireless line business (the CDMA component), and even consider a demerger of the mobile business - Mtel. A demerger of NITEL and Mtel will enable Transcorp raise badly needed cash and depending on the strategy still give its shareholders enough leeway to retain some shares in the mobile business. Fortunately, with British Telecom (BT) as Transcorp's technical partner it can learn a thing or two on how the former spun off BT Wireless in 2001, which included the mobile phone operator BT Cellnet (now O2) under a restructuring programme aimed at reducing its GBP30 billion debt. On the same note, the gestation period for making Transcorp's other assets profitable is rather long and fraught with uncertainty. The time frame, for instance, it will take to bring an oil block on stream could range anywhere from five to ten years, and even more. Whilst the construction of say a medium sized refinery that would most likely operate under an inefficient market structure could deter any right thinking investor from proceeding with the project. Besides, what's there to stop the incoming government from reversing the allotment of the oil block and licence for the construction of the refinery given that both were awarded under dubious circumstances? Obasanjo did it in 1999. His successor could take a cue from that under the guise of transparency. The long and short is that Transcorp should not have gotten listed on the stock exchange at this stage of its development. Its share price is being buoyed by what Alan Greenspan, the former US Federal Reserve Chairman liked to term "market exuberance." Pitiably, Nigerian investors are generally gullible and will fail to read between the lines hoping to reap a return on their investment in the near future. But given the present fundamentals, that is unlikely to happen any time soon. Transcorp will nonetheless go all out to convince investors that its shares have been fairly valued and an excellent investment opportunity. The question that readily comes to mind is, on what basis? Is it based on potential cash flows that have been discounted against the present value of assets which as earlier pointed out will take some time to generate income for Transcorp? The good thing is that the market always has a way of readjusting itself after a misalignment. It will be fairly easy to forecast that increased demand will push up Transcorp's shares through the roof in the coming months before and after the IPO, thereby granting the company access to cheap funds sourced from the capital market. But as investors begin to sell off their shares to reap from the capital gains thereof, there will be no where else for Transcorp's shares to go but down. Copyright 2006 This Day. Distributed by AllAfrica Global Media (allAfrica.com). |