Multinationals in Nigeria: once they struggle, they want a larger stake...

Dear Africa Interested Individuals:
                                                        In 2006, Cadbury Schweppes UK increased its stake in Cadbury Nigeria from 46% to 50.04% giving the parent majority control.  By December 2006 a grievous accounting scandal broke that led to the removal of top management of Nigerian origin and the restatement of earnings going back three years.  The increase in stake took place in the same year of the accounting scandal.  Less than three years later in 2009, the parent increased its stake to 75%. 

Unilever UK earlier in 2015 successfully increased its stake in Unilever Nigeria from 53.4% to 75%.  Unilever Nigeria is struggling and has been struggling since 2011 from my own vantage point.  The best analogy I can give here is when a baby's cry becomes a shrill.  Many people are talking about Unilever Nigeria's struggles now because it is more than obvious.  Another multinational sought an increased stake when the going got rough and the best way to toughen up is to increase your stake.

Glaxo Smithkline tried unsuccessfully to increase its stake in Glaxo Consumer Nigeria from 46.4% to 80% in 2012-2013.  The final approval needed was not granted by the Securities & Exchange Commission of Nigeria and the deal fell through.  The company was asked to buy its shares on the open market like every other interested investor.  This is the same period that Suntory Foods of Japan bought out the Lucozade and Ribena global brands from Glaxo UK fr about $2.1B.  Lucozade and Ribena contribute more than half of the operating profit and sales of Glaxo Consumer Nigeria.  Fortuitously, Glaxo Consumer Nigeria was given a special license to continue production of both brands by Suntory Foods locally despite the global divestment by Glaxo UK.  The deal for an increased stake did not go through and Lucozade & Ribena are still part of the product portfolio of Glaxo Consumer Nigeria.  

The Nigeria Bottling Company (manufacturers of Coke, Sprite & Fanta) announced publicly in December 2010 that it intended to delist from the Nigeria Stock Exchange (NSE) to enable it "invest $300m in Nigeria towards the modernization of its infrastructure, enhancing its supply chain capabilities and strengthening of its commercial platform."   Nigeria Bottling Company was struggling at the time with declining profit, sales growth and increasing debt burden.  Apparently, the parent company CC Hellenic, was not going to sort out the company's gargantuan problems without the benefit of full ownership.  Nine months later in September of 2011 after all approvals necessary were granted, the company was delisted from the NSE after more than thirty years on it.  The company continues to operate in Nigeria as a private entity.  

Now, to the present.  Guinness Nigeria is struggling as I have mentioned in some of my articles on this blog and is pretty much obvious by now to the casual observer.  The parent company Diageo, has just declared its intention to increase its stake in the local arm to 70% from 53.4%.  Guinness Nigeria has been struggling by my reckoning since the 2012 fiscal year though, most other observers caught on about a year ago.  The same formula is applicable once again of "when the local subsidiary struggles or experiences a significant negative event, we will acquire a larger stake at prices way below when we were not struggling."    

Guinness Nigeria has been trading at over N200 easily for the most part over the past three years prior to 2015.  Now, the parent company will increase its take by about 40% at a price (N175) it could not get when Guinness was doing just OK in 2012, 2013 and part of 2014.  

The saying, one man's pain is another man's gain comes to mind here.  Investors experience declining profits, prices and next thing experience declining ownership stakes.  I guess when it rains, it just has to pour.  Who will bell the cat?  That is what I want to know.  

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Comments

  1. WalleSeptember 20, 2015 at 11:27 AM

    Hi Jude, i think the issue is pretty straight forward if you look at the pattern of purchases. For both Unilever and Diageo its not just at their Nigerian subsidiaries they are raising stakes in but at their Indian units as well. For me its easy. EM/Frontier markets have been experiencing a sell-off so naturally this is the best time to buy for everyone parent, foreigner and domestic investors if the companies have long term value. These companies might be struggling but so is the broader economy. Are these issues permanent or transient? I think in both instances the long term view on both countries is positive. If you're an investor and believe in the company (just as the parent does) you put your mouth where your money is and increase your stake. Else as they say if you can't take the heat get out of the stock (kitchen)

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