Barely ten days ago, the management of Cadbury Nigeria plc addressed key stakeholders in Nigeria’s capital market on the rationale behind their recently completed capital reduction exercise.
By simple definition, capital reduction is simply the process of decreasing a company’s shareholder equity through share cancellations and share repurchases.
The reduction of capital is done by companies for numerous reasons including increasing shareholder value and producing a more efficient capital structure.
Due to its rare occurrence in the Nigerian capital market, when Cadbury announced its plan to embark on capital reduction, it created a mixed feeling among its shareholders which promoted the company into a “Facts Behind the Capital Reduction” presentation at the Nigerian Stock Exchange (NSE).
Cadbury is one of the companies that are listed on the consumer goods segment of the NSE.
While receiving the company on the floor of the Exchange, Taba Peterside, general manager, listing sales and retention, NSE, commended the organisation for imbibing good investor relations principles by coming forward to provide the market with information about its recent reduction of share capital and share premium.
With a market capitalisation of about N185 billion as of December 31, 2013, Cadbury Nigeria has operated in Nigeria for over 50 years. The company has delivered strong returns to its shareholders over this timeframe.
Its share capital has increased following a combination of bonus share issues and several rounds of capital raising – the most recent of which was the 2009 rights issue when it raised N17billion. The balances in the company’s share capital and share premium accounts as of December 31, 2012, were N1.6 billion and N11.5 billion, respectively.
The company’s shareholders’ equity increased 58 percent between 2009 and 2012. Following a review of the company’s current financial position, the board of directors determined that the company had capital in excess of its needs.
The company said a number of approaches were assessed for utilising the company’s excess capital. First is the retaining capital. One of the options explored by the board was to retain the excess capital until such a time as sufficient opportunities for its deployment arise.
Another is to deploy capital immediately. The company realised that hasty deployment of capital in the absence of value enhancing opportunities may lead to destruction of shareholder value. And last option was the return of capital to shareholders.
The board deemed this approach to be the most ideal as it gave each shareholder the opportunity to invest the capital as they consider most optimal. Among these three options, the board considered returning excess capital to shareholders as the most suitable option.
Again, in returning excess capital to shareholders, the board explored three options. The first was a capital reduction, which is the process of decreasing a company’s shareholder equity; and excess capital, thus reduced is returned to shareholders.
The second option is through dividend. Dividends are typically paid out of the company’s distributable profits, however the capital reduction entails returning capital in excess of the company’s needs. While the last option considered was share buyback.
“Following a review of the complex legal and regulatory provisions that govern the implementation of share buybacks, it was determined that a share buyback was not the optimal approach in this instance,” they told shareholders and investors during the presentation at the NSE.
Considering the three options, the board decided that a capital reduction was the best option, thereby giving shareholders the opportunity to make their own investment decisions.
What does the capital reduction entail?
The capital reduction entailed: Returning excess capital of N11.9 billion to Cadbury Nigeria’s shareholders; cancelling two out of every five shares (“Cancellation Ratio”), and accounting for fractional shares. “The return of capital on account of the capital reduction was from existing resources and did not involve the company incurring additional debt. The capital reduction had the effect of reducing cash by N11.9 billion with a corresponding decrease in the share capital and share premium accounts.”
Implementation
The key steps that the company passed through in the implementation process are: board approval, shareholder approval, court order, Corporate Affairs Commission (CAC) filing, and transaction close. For the board to give its approval, they determined that the company had capital in excess of its needs and approved the return of capital to shareholders.
On shareholder approval, the company held extraordinary general meeting on December 19, 2013, where the shareholders approved the resolutions regarding the capital reduction.
On the court order, the Federal High Court granted an order sanctioning the capital reduction; while the court order was filed with the CAC after which the CAC issued a certificate of capital decrease. “Implementation is complete. Shareholders have been paid and restrictions on trading the shares of Cadbury have been lifted,” the company told investors.
The result
Number of issued shares pre-capital reduction was 3,130,374,238. Number of shares cancelled was 1,252,172,198. While number of issued shares post-capital reduction is 1,878,202,040. The post capital reduction market capitalisation is N170.509 billion. As of January 8, 2014, the market capitalisation was N182.406 billion. The post reduction share price of Cadbury Nigeria was N90.78. This is against price per share as of January 8, 2014, which was N58.27.
By: Iheanyi Nwachukwu
