The real deal on African IPOs

- Finance - Feb 03, 2011

In 1989, there were only five sub-Saharan countries with stock exchanges. But today more than 16 countries have bourses with a capitalisation of more than $400 billion. Most however, have remained stagnant for years with many businesses not listing.

An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company issues common stock or shares to the public for the first time. In 2010, this became a popular occurrence for African companies seeking to expand.

Issued by smaller, younger companies seeking capital to expand, IPOs can also be conducted by large, privately-owned companies looking to become publicly-traded.

In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price, and time to bring it to market.

An IPO can be a risky investment. For the individual investor it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company.

Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

Brokers at South African bourse the Johannesburg Stock Exchange say the development of stock markets and IPOs in Africa will boost domestic savings and increase the quantity and quality of investment.

More and more companies seem to be paying attention and are taking the call to attract finance through Initial Public offerings.

Top Africa IPOs 2010

Earlier this year, telecommunications giant MTN announced a $1.2 billion BEE transaction that was oversubscribed by the time of the closing date.

The transaction broadened MTN South Africa’s effective BEE ownership through a public offer to Black individuals and groups.

The IPO takes MTN’s effective indirect BEE ownership level in South Africa beyond 30%, when combined with MTN’s previous BEE initiatives.

Dangote Group

In West Africa, the most prominent IPO for the year came from one of Nigeria’s largest conglomerate, Dangote Group.

After months of speculations, Dangote Cement was listed by introduction on the floor of the Nigerian Stock Exchange in October.

The company offered a million of its shares to the market in a special sales offer at the rate of N135 per shares.

Market commentators say the listing has the capacity to diversify the capital market and further deepen it effectively, especially once all the 5.5 billion shares the company will eventually offer to the market are taken.

In Zambia, in a completely different sector of the economy, copper mining giant Vedanta Resources raised $1.1 billion in a London IPO to expand its mines in Zambia and pay debt.

Tips for African stock exchanges

Although African stock exchanges have come a long way in the last decade, there are still some challenges that are stifling its growth. International brokers give these tips for the bourses.

• Make it mandatory that annual reports be published online as soon as they are made available or posted to shareholders. Less than 30 percent of African annual reports are currently online.

• Require an IR contact to be clearly indicated on the company website or stock exchange website and require a maximum turnaround time. Investors should have access to companies that they own. They usually do not.

• Automate the publication of corporate actions online with free access to attachments. The JSE has been offering the SENS platform to African stock exchanges for years – why not use it? Investors need information to make educated investment decisions.

• Incorporate the core investor relations best practices into the listing rules. And name the companies that are not compliant. Why? It makes sense - and it creates value.

The future of IPOs

East Africa has been the trend setter for the continent in 2010 when it comes to business innovations, by finding ways to make it easier to do business in the region.
IPOs in the region will now be priced in the currencies of the five east Africa community countries, a move expected to save investors foreign exchange losses.

The East African Securities Exchanges Association says investors will now be able to buy shares using their local currencies.

Summing up the situation, Chairman of the Association Gabriel Kitua says: “Payments for shares during regional IPOs remain a challenge, with reference to exchange rate risk and transfer charges levied by banks, and there are delays in refunds to investors.” The road ahead for IPOs in Africa remaining challenging and there are definitely important lessons to be learned here. But there are more bourses now then 20 years ago. It should mean we are on the right track.

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