On Monday October 28, 2024, Transcorp Plc announced a successful completion of its share reconstruction, consolidating the total number of issued shares at a ratio of 1 to 4. cing the total issued and fully paid shares of Transcorp Group from 40.6 billion shares to 10.2 billion shares, the company said it was “a strategic action aimed at maximising long-term shareholders value”.

The company’s claim of enhancing shareholder value as the major objective its share reconstruction is not supported by available facts and history of shares reconstructions at the NGX.

Different from Transcorp’s shares reconstruction, Airtel Africa Plc has been mopping up its own shares in a protracted shares buyback scheme in which the company targets to cancel out significant percentage of its initial share capital.

By embarking on share buy back, the dual quoted telecoms giant aims to reduce the number of its issued share capital traded in both the NGX and the London Stock Exchange (LSE). So far, more than a quarter of the company’s shares have been repurchased and canceled out.

Shareholders’ interest

Although shareholders of both companies endorsed the exercise, evidence from similar exercises in the past showed that shares reconstruction or buyback have never benefitted shareholders. If anything, it has left them worse off.

What is share reconstruction/ buyack?

In simple terms, a share buy-back is when a company acquires shares in itself from existing shareholders, and then cancels these shares.

On the contrary, share reconstruction or reduction in share capital occurs when any money paid to a company in respect of a member’s shares is returned to the member.

Share buyback and as well as reconstruction has become very appealing to many issuers in the Nigerian capital market for several reasons.

However, stockbrokers disagree on the advantages or otherwise. When you do shares buy back, you want the market to move the price. But when you do reconstruction, you move the price by way of maintaining your market value.

In other words, the market value of the stock remains. It does not change the value at the point of reconstruction. The reconstructed shares will still reflect in the valuation of the stock.

But with cancellation of the units of shares after buy back, the market value will change because those shares cancelled out will not be counted as part of the shares capital of worth.

In other words, the moment you cancel out shares bought back, the market value will instantly reduce because it means that you have returned money back to the owners of those shares cancelled out.

Thus, the stock cannot continue to maintain that value any more, having depleted the capitalisation.

Stockbrokers disagree

The Managing Director and Chief Executive Officer, Highcap Securities Ltd, Mr. David Adonri, said whether reconstruction or share buyback, if it does not add value to the stock, then it is an exercise in futility. “I don’t see any significant benefit of any reconstruct, but the owners of the company may think that if the shares are few, then the dividend that each share will receive will be more reasonable.

But that is actually a mirage. We look at the dividend yield; if the dividend yield does not change as a result of the reconstruction, then it is like motion without movement.

“Secondly, there is also the psychological aspect that when the number of shares is now reduced, if the company becomes more prosperous in the future, the company has opened the gate way for bonus shares to be issued.

“Again, the company has opened the gateway for new public offerings without seriously diluting the ownership of existing shareholders. “They think that the number of shares is over-bloated; it is psychological nothing more. Shares of most companies reconstructed in the past never impacted on them positively.

“Not all. I am not aware of any equities that improved their fortunes after reconstruction. The whole exercise is just psychological. It is a motion without movement. “The analysts will always analyse equities based on their fundamentals. What is the earning per share? What is the dividend pay out? Has the earnings

More local investors are more actively playing in the market, we tend to see some resilience and stability

per share changed because the shares are fewer now? What of the dividend yield per share did not change, then the reconstruction is an exercise in futility. To that extent, it is not the reconstruction that strengthens the fundamentals of the company.

“The management should strengthen the fundamentals of the company. That is the bottomline by increasing the profitability of their business by increasing their turnover and reducing their cost. When their profitability increases, it will impact on their net assets value.

This will in turn increase the value of their stock.” However, Mr. Tujudeen Olanrewaju, the MD/CEO of Wyoming Securities Ltd, holds a different view. He said share reconstruction and buyback did not add value to the companies in the past because the market was having challenges then.

But now, he said the market has stabilised. “The problem is that the time you are referring to was the time we had an abnormal market. That time whether you do reconstruction or shares buy-back, you are not likely to get the desired result because the market was in abnormal situation.

“But now the market is in a stable mood, and we are not likely to have that kind of depression in share price after reconstruction. The issuer itself (Transcorp) is reacting to stability in share price.

That is they felt that they could reconstruct and still maintain that same price value,” Olanrewaju stated. He continues: “They don’t need to defend the stock price because they are going to have smaller number of shares in issue, and that will indirectly affect the float.

You are not going to have the shares flying around as when they had so many shares in issue. “That is the essence of reconstruction: to limit the ability to cause share price depreciation through unnecessary offloading of shares in the market even when the company does not have any fundamental problem.

“To that extent the only problem that can cause the stock price to come down is when the fundamental goes down. But if the fundamental gets stronger than it used to be, the price will go up. The fundamentals will determine the share price.

“In conclusion, what we use to witness in the past after shares reconstruction you see the price dropping to par value as was the case with some of those insurance companies, we are not likely to see a repeat of that. “Some stocks reconstructed in the past but later dropped to their par value are many, especially insurance stocks.

“In an effort to stabilise their share prices, several of the insurance firms did reconstruction including Mutual Benefits Assurance, defunct Skye Bank, Guinea Insurance, etc.

“Eventually, the share prices tumbled down to their par value after the reconstruction exercise. That was then because we didn’t have a good market. “Now, the market seems to have attained a level where there is resilience and stability.

Last line

“Ordinarily, with interest rate going up, one would expect that the equities market would have gone down below the level it is today.

But because more local investors are more actively playing in the market, we tend to see some resilience and stability. That is why I have said that we may not have a repeat of the past again,” the stockbroker concluded.

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