Business News

By James Anyanzwa

The Co-operative Bank’s pursuit to raise Sh10 billion through an initial public offering (IPO) has started off with early indications that the offer could be priced at about Sh14 a share.

In the IPO, billed to the second largest after Safaricom, more than 50,000 individual shareholders of the bank are expecting to boost the value of their investment when the shares list at the Nairobi Stock Exchange (NSE).

As the shareholders bet on the bourse, NSE investors are eagerly waiting to see if the listing will end the bear run, that has culminated in prices of many counters declining in the last two months. The bearish market has been attributed to rising inflation, that has left many people with less disposable income to invest, and the delayed processing of the Safaricom IPO refunds that were expected to trickle into the bourse.

The Co-op Bank Sh10 billion IPO, the second largest after Safaricom, is expected to be launched on October 17. [PHOTO: MARTIN MUKANGU/STANDARD]

Last month, stock prices hit six-month lows, as the main Index approached a key psychological support level at 4,500 points.

The main NSE 20-share index closed at 4,565.88 points on August 13, its lowest this year since it reached 4,576.31 points on January 29, during the height of post-election crisis.

On Friday, the index closed at 4,648.78 points, losing 41.14 points over the previous week.

According to confidential documents seen by FJ, the provisional figures, which the bank has tightly kept under wraps, reveals that the bank would offload about 700 million shares to the public.

shareholding structure

The executive summary of the report to the lead transaction adviser indicates the bank would issue new shares that would alter its shareholding structure.

The shareholding of the Co-opholding Co-operative Society Ltd (former class A shares) currently fixed at 77 per cent would be diluted to 62 per cent, while those of individual members (former class ‘B’ shares) would climb 1,500 basis points to 38 per cent from 23 per cent.

The Co-opholding Co-operative Society Ltd, which commands the entire shareholding previously held by 3,805 cooperative societies, would become the strategic investor and majority shareholder in the bank.

Pressure is, however, likely to mount on the transaction managers to ensure the offer gets full subscription given the bearish trend in the equity market and investor disappointment occasioned by the delay in processing Safaricom IPO refunds.

Financial analysts interviewed by the FJ hold diverse views on the IPO, with others arguing that although the offer maybe fully subscribed, the interest would most likely emanate from institutional investors and individuals within the cooperative movement.

retail investors

“For retail investors I feel the timing is too soon because having burnt their fingers in Safaricom IPO may feel reluctant to participate in the Co-op offer,” says Mr Samuel Gichohi, an investment analyst at Francis Drummond Investment Bank.

“We will not see much hype from retail investors but institutional investors would go for it,” he said.

Some analysts, however, contend that the Co-op Bank IPO exhibits different dynamics in the sense that its shares have been held in the past by co-operative movements and individuals who are likely to take up the new shares on offer.

But the bearish mood in the market could be a major roadblock to the full subscription of the offer that is due for launch on October 17, subject to regulatory approvals.

“Of course there are concerns that the market is bearish. If those sentiments persist then we may not see the subscription to levels that we have witnessed in past IPOs,” says Mr Edward Gitahi, a portfolio manager at AIG Investments.

Co-op Bank managing director Gideon Muriuki is confident that the offer would be fully subscribed to allow it tap into fresh resources following a successful turnaround strategy.

The bank sustained the strategic business and operational restructuring reflected in a Sh2.3 billion profit last year, marking a turn around from a huge loss of more than Sh2 billion in 2001.

According to Maina Wachieni, an assistant fund manager at the British-American Asset Managers, the pricing of the offer could be a major factor in determining the type of investors it will attract.

“I don’t think that subscription would be an issue. The pricing will determine the invetors who apply for the IPO,” says Wachieni.

financial base

“The IPO could be snapped up by the cooperatives but if it is well priced a lot of interest may come from retail investors,” he says.

Efforts by FJ to obtain comments from the bank and the transaction advisers proved futile as the institutions refused to comment, citing confidentiality agreement signed between themselves.

The capital injection is viewed as critical to shoring up the bank’s balance sheet so as to solidify its financial base while giving it room to deepen its range of products.

The capital is badly needed to push the bank’s growth and expansion agenda and strategically position it in the competitive sector.

The projected proceeds from the IPO will also provide a pricing mechanism of the bank’s shares, which has already converted its legal status to a limited liability company to satisfy the Capital Markets Authority requirements for listed companies.

The new arrangements approved by the ministry of Finance involves the transfer of the business, assets and liabilities of ‘The Co-operative Bank of Kenya Ltd’ registered as a cooperative society to ‘The Cooperative Bank of Kenya Ltd’registered as a limited liability company.

The structure will ensure the Co-op retains its strategic identity as a bank serving more than seven million members of the cooperative movement in Kenya.

More than 51,000 individual (formerly class ‘B’) shareholders have been allocated a similar number of shares they hold in the new bank.

The cash raised from IPO will finance the bank’s mortgage products, ICT infrastructure and expansion of the branch network.

consulting team

The country’s fourth largest bank by asset base recruited Dyer and Blair Investment Bank as the lead transaction advisor.

While Standard Investment Bank and Faida Investment Bank were picked as lead sponsoring brokers.

The co-sponsoring brokers are CFC Financial Services, Discount Securities, Sterling Investment Bank consortium and African Alliance.

Six years ago, investors bought shares of the bank for Sh100 each in a private placement.

But the bank’s listing is expected to boost its attractiveness in the market, given that the Class B shareholders have for the last 10 years yearned for a platform to trade their shares.

Shareholders are also expected to reap from increased liquidity because the shares will be split several times, making them affordable to more investors.

Two weeks ago, the bank reported a 50 per cent rise in its half-year profit for the period ending June 30.

The bank’s pre-tax profit hit Sh1.7 billion and indicated that it was on course to surpass its Sh3 billion target at the end of the year. The results marked improvement over the Sh1.1 billion reported in the first six months last year.

Interest income rose 30 per cent, from Sh2.5 billion to Sh3.3 billion. The co-operative movement’s main banker said lending to businesspeople and farmers grew 45 per cent, from Sh30 billion in June of last year to Sh43.4 billion.

Over the same period, customer deposits rose from Sh50.8 billion to Sh59.1 billion representing a 16 per cent rise. The balance sheet grew from Sh58.7 billion to Sh72.1 billion.

Co-op Bank’s other subsidiaries include Co-op Consultancy Services has chalked up Sh17 billion to make it the top locally owned fund manager.

The other, Co-op Consultancy Services, offers front office service activities (Fosa).

Some 100 Saccos are expected to open Fosas this year to serve their seven million members.