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The bill’s on Nigerian index trackers as MTN shares march higher

By David Whitehouse
Posted on Tuesday, 21 May 2019 17:31

MTN is ready to list in Lagos. REUTERS/Afolabi Sotunde

The political context of MTN's listing by introduction of its Nigerian business, and the mechanical daily increases of 10% in the share price, should set alarm bells ringing.

Criticism is mounting over a price-setting mechanism which has seen MTN Nigeria shares rocket on the Nigerian stock exchange just after their flotation on 16 May.

The mechanism – known as listing by introduction – sets the price of an equity based on public market demand to establish a reference price, instead of the more usual ‘book building’ process before an initial public offering (IPO).

Yet listing by introduction could complicate the process of setting a fair price for the equity – despite MTN’s strong market position.

MTN is the telecoms market leader in Nigeria, with 65 million customers out of 173.4m for the sector. It delayed plans for an IPO because of a tax dispute with the Nigerian authorities, which claim it owes $2bn. Feyi Fawehinmi, a Nigerian accountant in London, said that the government insisted on a listing, but the issue of the possible fine made an IPO possible. That made the listing by introduction the simplest option, he says. The shares were “clearly undervalued” in the process. “No one wants to sell at that price. It’s a political listing,” says Fawehinmi.

An IPO is usually preceded by a period of ‘book building’ where the demand for the stock, and the price that investors will pay, is established. The company will often try to maximise receipt. And if a minimum threshold is not met, the IPO won’t proceed. A listing by introduction effectively reverses the order: the public market is used to set a price before any shares are sold. The company does not receive any new capital as a result of the quotation.

The process is rare, but not unique – it was done in 2018 by Spotify in New York. After an initial period of appreciation, Spotify shares now trade at below the reference price that was used. In the case of MTN Nigeria, book building is being replaced by stoking demand for the shares through public quotation in a context of enforced scarcity. Since the listing, the shares have been posting regular daily increases of 10% – the maximum allowed under Nigerian stock market rules.

Number two and rising

The Nigerian stock exchange has denied that there is anything improper in the process, arguing that MTN Nigeria’s free float at the time of the listing comfortably exceeded the requirement of N40bn ($111m).

  • Officials hope that the introduction will lead to greater breadth of interest in the Nigerian stock market.
  • The listing has made MTN Nigeria the second-largest company on the country’s stock exchange, behind Dangote Cement.
  • According to Nairametrics, MTN Nigeria may be on course to take over the top spot.

In its listing memorandum, MTN Nigeria states that the aim is “better liquidity of its ordinary shares in the secondary market” and “access to a platform for raising long-term capital from a wide range of local and international investors”.  The biggest shareholders in MTN Nigeria are shown in the document. Cross-trading between these shareholders is continuing and is designed to make sure the price keeps going up, Fawehinmi says. “They’ll keep driving it up until the price is right to sell.”

That could be at N200 per share or more, he says, adding that he suspects that the mooted IPO will be postponed indefinitely. Those hurt will be the index trackers – like exchange traded funds that invest in the market’s biggest companies – which are obliged to buy what is already the market’s second-biggest component. “They have no choice,” says Fawehinmi. Retail investors have also been queuing up for the chance to buy a share seen as certain to appreciate.

Fawehinmi doubts that the process will boost interest in the Nigerian stock market’s prospects, citing the engrained expectation from local investors that dividends must be paid. That makes equity an expensive form of financing in Nigeria, he says. “No one goes there to raise money. There could never be a Microsoft in Nigeria.”

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