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Wednesday, May 21, 2008

Details on how ordinary Kenyans got screwed in SafCon's OFS

Morgan Stanley (MS) & their local partner (Dyer & Blair) had sole rights to advertise and promote the SafCon OFS abroad. By bidding 5 cents, D&B became the Transaction Adviser (TA).

A conflict arose since the TA is also a stockbroker and placing agent. D&B advised that MS gets sole rights for foreign applicants. D&B then shares in the profits made by MS. So the 5 cents is elusive i.e. it cost Kenyans far more than 5 cents. it cost them billions!

MS could choose who they wanted to participate in the OFS. They could reject an application for any reason they deemed fit. They also could peek at the applications from other brokers thus allowing their clients (& themselves) to adjust the bids as needed.

Question: So what happened?

Answer: Well, MS picked applicants who were in their good books. This means THEIR clients who provide high-priced MS with business. Some of these applicants were 'connected' to the political establishment so while the ordinary Kenyan gets 30% of the application, MS+DB 'clients' could get 20%-35% unhindered!!!

MS could also buy for their own books meaning they reject valid applicants who offered more than 5.50 to leave the field clear for them.

Question: Why was 20-35% of a firm with 99.9% Kenyan subscribers & revenue being sold to foreigners who contribute little?

Answer: Well, it was a payback for political support. Coldtusker was NOT invited to participate! Many Kenyans would have willingly paid more than 5.50 ( including yours truly) for the 20-35% that was offered to the foreigners. It turns out there were applications/bids at 6.50 but 5.50 was chosen to benefit the so-called 'foreigners'. Therefore, at the MINIMUM, Kenyans lost (2bn shares x 1/-) KShs 2bn. The 1/- is what the real market would have paid above the 5.50 the GoK accepted.

If the allocation to foreigners was 35% then the loss could be KShs 3.5 bn.

Many Kenyans borrowed and had to pay upfront while the 'foreign' (in parentheses coz these foreigners were simply a front. There is NO scrutiny of they are!!!) applicants pay AFTER the allocation!

Equity was lending at 18% pa + 3% commitment fee.

10,000 shares@5 = 50,000. The issue closed on 23 April but refunds will be disbursed at the earliest on 10 Jun & clear 4-5 days later thus 60 days of interest on 50,000.

50,000 x 3% = 1,500
50,000 x 60/360 = 1,500 (Most banks use 360 days per year when charging interest)

allocation of 30% = 3,000 shares

Cost of 3,000 shares = 15,000 (for the shares) + 1,500 (Commitment Fee) + 1,500 (Interest) = 18,000
Cost per share = 18,000/3,000 = 6/-

The losses will run even higher than what I have shown above if the price of SafCon exceeds 6.50 per share - which is likely.

A pity but Kenyans continue getting screwed... royally screwed...


bankelele said...

I guess after listing we'll know how foreign, the foreiners were m, and what criteria MS used to define these. The MS site has no mention of their Safaricom work last time I checked

Chipongwe said...

having been an advisor in IPOs and seen some of the mess ups in IPOs in the good old bad days the prospect of a balanced loyal diverse shareholder base is not a bad one as foreigners provide a source of demand for the locals, provide capital that may not be available locally, provide greater corporate governance scrutiny. Furthermore foreign participation in one large stock will generate interests in other areas..... not sure how true your other allegations are about preferred alotments etc as I am sure MS are regulated against this sort of point is that in the long term a diverse shareholder base is a good thing

Anonymous said...

I agree. A minimum/reserve price of at least 6shs (20% premium) should have been set for foreigners. Also, MS should, in the interst of transparency, indicate the bids they got - price and volumes - and why they chose the bid of 5.50shs

Chipongwe said...

This issue is so complex but give me three reasons why my dollar is worth more than a foreigners - this is discrimination. The allocation is the only basis upon which to favour locals not price.

If you open up the pricing side of things for all to see there will be a free for all. The adviser is paid lots of money to act in the bests interests of the company (and his client hence the discount)

I bet you that when Kenyan companies are desparate for new capital a premium wont apply - suddenly all investors are equal - hypocrisy in your own back yard

Anonymous said...

We build this company from scratch with no help from any foreigners and its very annoying to be given 21% of the shares we applied for. Why are we being played?

Chipongwe said...

no help from foreigners.....mmmmm not sure about that