BusinessSectorsFinance: Foreign firms go local

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Posted on Wednesday, 11 April 2012 17:08

Finance: Foreign firms go local

By Gemma Ware and additional reporting by Gregory Mthembu-Salter

Plans by more big-spending transnational companies to list on local equity markets raise questions about changes in corporate governance and ownership patterns.

sudan stock exchange/ photo/ reutersStock exchanges across Africa are set to ride a wave of billions of dollars of investments in energy, mining and transport projects over the next five years, according to African officials and international bankers. Many of the companies making those investments are under pressure to list in Africa's equity markets.

The Bank of New York Mellon Corporation (BNY Mellon) is in "very active discussions" about 13 new listings by multinational companies on two African stock exchanges, a senior official at the bank tells The Africa Report. This follows the success of across-listing by Canada's First Quantum Minerals (FQM) in Zambia last July. 

Following FQM's initiative, India's Vedanta Resources, the majority shareholder in Konkola Copper Mines, opened discussions about a listing with chief executive of the Lusaka Stock Exchange Beatrice Nkanza. Sheiskeen to get Chinese companiesto list in Lusaka as well. European and North American companies have led the charge to African bourses, but few Asian and Latin American companies have listed locally.

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That could change as political pressures mount and companies such as Brazil's Vale and China National Offshore Oil Corporation launch infrastructure, mining and oil projects worth more than $20bn in Guinea and Uganda. 

The volume of new investments, together with growing demands for corporate accountability, is encouraging firms to seek local listings. London-based Ernst & Young forecast that foreign direct investment in Africa will hit $150bn per year by 2015, up from $84bn in 2010. 

Dar es Salaam Stock Exchange (DSE) is talking with four international companies about listing, says chief executive Gabriel Kitua. In Feburary tanzanite miner Richland Resources, listed on London's Alternative Investment Market, announced plans to list in Dar by April. Kitua strongly backs such listings: "The only way citizens can be made to enjoy the benefits of the resources of their country is to be part of the investment itself... through the capital markets where the investments can be split in small portions that can be purchased by anyone."

Others are exerting more pressure on companies to list locally. At a summit in Abuja last November, Nigeria's central bank governor Lamido Sanusi proposed that major foreign companies be legally obliged to list in Nigeria. 

Raising the stakes

Such a move would raise questions of governance and local shareholder power. For now, the few African shareholders in multinational companies that operate in their countries have no more than a symbolic stake. The situation could be different if more of the $130bn in African pension funds were invested in blue-chip companies quoted on African stock exchanges. This could give a greater sense of ownership to African shareholders, and it would increase pressure on the companies to create jobs and award more contracts locally. 

Companies such as Ireland's Tullow Oil, whose phenomenal growth was premised on a bold expansion strategy in Ghana, are trying to stay ahead of the game. Tullow listed in Accra last July and is set to do so in Kampala following agreement on its production licence with the Ugandan government this February. "It remains an intention of Tullow to list in Uganda," according to the company's head of media relations George Cazenove, "but I can't give any guidance just yet on timing or plans." 

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Tullow's initial public offering (IPO) of just more than 3.5m new shares in Accra was about 0.4 percent of the 900m shares traded at its main listing in London and subsidiary listing in Dublin. As all Tullow shares can be traded in Ghana, sharp investors could take advantage of price differentials between the markets. On 2 March, Tullow shares were selling in London at £15.06 ($23.50) or 40 cedis; in Accra, it was 35 cedis, a difference of £1.80 per share.

Ghanaian institutional investors snapped up most of the newly issued Tullow shares. Liquidity increased a little after the Ghana Stock Exchange reduced the minimum trading lot for high-valued shares such as Tullow's to 10 shares rather than 100. Tullow shares are the 16th most active out of 35 in Accra."

The illiquidity is caused by the absence of sellers," says Cazenove. "We are aware that it is a problem and we are looking for solutions with our brokers in Accra." Those brokers expect busier times with more oil and mining companies listing as the energy industry expands. Mamphela Ramphele, chairwoman of South Africa's Gold Fields, tells The Africa Report that the company is considering listing in Accra. Texas-based Kosmos Energy also plans to list in Accra as it has improved its formerly prickly relations with President John Atta Mills's government. 

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According to Robert Besseling, at London-based consultants Exclusive Analysis, local listings by multinationals are primarily aimed to help companies reduce political risk and improve relations with host governments: "The real value is in NewYork, Hong Kong or London, not in Lusaka or Dar es Salaam. By listing locally you can gain goodwill."

Multinationals listed in Johannesburg and Harare, such as Rio Tinto and Old Mutual, have become "part of the furniture," says Besseling. But they are subject to political risks in the form of new indigenisation laws, nationalisation and expropriation. Some newer companies may think that by launching IPOs on  African exchanges, they are at less risk.

Source: LSM and FGMLondon Stock Exchange-listed miner African Barrick Gold (ABG), announced a secondary listing in Dar es Salaam last December. Parent company Canada's Barrick Gold holds a 74 percent interest in ABG, which only operates in Tanzania. "We don't really see it as a way to raise capital," says ABG's vice president for corporate affairs Deo Mwanyika. "We were the first company in Tanzania to cross-list. We did it because we wanted to spread ownership of the company within Tanzania," he explains.

ABG's listing in Tanzania means that its shares are now available for investors in Dar es Salaam to buy through instruments called DSE depositary receipts. The shares must be bought through a London broker and then converted into DSE depositary receipts using a Tanzanian broker.

Affordably ownership 

Buyers are yet to flood the market. At TSh11,365 ($7) each (£4.50 in London) in early March, ABG's shares were the most expensive on the DSE. The second most expensive, Jubilee Holdings, were TSh5,860. ABG decided that it would not issue new shares at first, but its officials are looking at new ways to promote liquidity and ownership of shares in Tanzania.

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"Huge activity will only come when an IPO comes on the market," explains the DSE's Kitua. "For now, we don't have many shareholders holding Barrick shares in Tanzania." Canada's FQM pioneered the depositary receipt system when it listed in Lusaka last July. Its Zambian Depositary Receipts (ZDR) – a listed security in Lusaka– are tradable portions of FQM shares listed on the Toronto Stock Exchange.

Usually, depositary receipts can be freely exchanged with ordinary shares, meaning investors in Toronto can buy ZDRs in Lusaka and vice versa. However, FQM decided to block the sale of ZDRs in other markets for the first year after the launch. "We had to ring-fence the arrangement to preserve the shares in Zambia, otherwise they would all get sold via our other listings," explains FQM president Clive Newall.

"It's not so much about raising capital, we have other exchanges to do that, but more about ensuring more ownership within Zambia." The Lusaka exchange's Nkanza backs the plan: "If the share is too expensive in our market, then the depositary receipt is the way to go." When FQM started trading in Lusaka in July 2011, its Canadian share price was C$140 ($140) and out of reach for almost all local investors. Even at 7,300 kwacha ($1.35) per ZDR, investors bought just about half of those allotted. After FQM announced a final dividend payment in early March, around 3,000 ZDR holders in Zambia were expected to share out around C$82,000 ($82,700), to be paid in kwacha.

A voice for locals 

Mary Gormley, regional manager for sub-Saharan depositary receipts at BNY Mellon, says companies often launch depositary receipts to offer shares to local employees. More than 2,000 of FQM's employees bought ZDRs.

Local listings can promote a company's cause politically, says Gormley. "It can be to do with marketing the company, visibility and brand awareness." Most of the effort so far has been on the financial mechanics of local share issues, but, as African stock exchanges expand, the implications of localownership could reshape companies' strategies.

For now, the voice of African shareholders is muted. In FQM's case, ZDR holders have the same voting rights as other shareholders, but the company does not hold an annual general meeting (AGM) in Lusaka. ZDR holders vote by post at the Toronto AGM. Tullow says it will hold a shareholding meeting in Accra, as it does in Dublin, soon after its AGM in London. It may be that such AGMs become an important channel for citizens and institutions to influence an international company's operations and policies.


This article was first published in the 2012 April edition of The Africa Report, on sale at newsstands, via our print subscription or our digital edition.




Last Updated on Wednesday, 25 April 2012 13:29

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