Now that you’ve found love what are you gonna do with it? A few ideas for African Petroleum (AP) now that it has won Public Opinion and Regulators’ vindication in the share price manipulation case against Nova Finance and Securities.
The publication of alleged evidence on the manipulation of African Petroleum's share price against Alhaji Aliko Dangote by the board of the petroleum marketing company has brought two burning issues to the fore. First, the inability of the stock exchange to identify the actions; second, the basis for the valuation and high multiples of AP's shares. Since the AP board's release of Alhaji Dangote's clearing house transaction details to support its claims, several news articles have been written, while regulators have launched investigations into the matter. The case which is shaping to be a protracted one, already has some commentators declaring African Petroleum, and specifically, Femi Otedola, its chairman, as the victor of the first round. The Securities and Exchange Commission has placed a one year suspension on Nova Finance and Securities, stock brokers to Alhaji Dangote, while Eugene Anenih, its CEO, has been banned from working in the securities industry for five years. Further, a number of shareholder associations and individual investors have condemned Alhaji Dangote in strong terms, including calling for his removal as the first vice-president of the Exchange. In the heat of the debate, particularly on such a sensitive issue, a number of opportunities are being missed by African Petroleum. If winning public opinion is the single goal of AP, that much, so far, seems a secured objective. However, by its failure to follow up with an intensive investor relations program, African Petroleum may be allowing whatever victory it has won in the court of public opinion to slip out of its hands. In this post, we argue that for companies like AP whose share prices are under assault, but whose management is convinced that the sustained and widening gap between the economic value of the firm and the market price of its shares are driven by 'ex-analytical' factors, it is their duty to proactively communicate the performance results and cash-generating potential of the firm. In fact, we hypothesize that failure to do so allows room for 'bystander' investors, not initially involved in the sell-off, to join the bandwagon, taking the silence of the firm as a signal that the current downward trending market price is the true reflection of the state of the business. We then go on to list a number of areas that AP needs to elaborate on in its investor communications. We conclude by arguing that for well run companies with solid prospects, distortions in market valuation are self-correcting, but that this process can be made quicker with a responsive, credible and robust investor relations program.
It is arguable that the decision of the board of African Petroleum to publish the trading records of Alhaji Aliko Dangote in the March 23 edition of ThisDay newspaper as supporting evidence in its claims that he was behind the aggressive crossing of its shares, without a beneficial change in ownership, over an eight week period, marks the entry into unfamiliar territory by the board of a Nigerian issuer which believes that its share price has been manipulated. According to the company, the pseudo-transactions created an appearance of active trading in its shares, when in reality there was none. Less than two weeks later, Day Spring Law Office, filed a petition on behalf of Femi Otedola, the CEO and chairman of African Petroleum, Zenon Petroleum Oil & Gas Limited and Luzon Oil & Gas Limited, seeking damages of N117,188,517,953 being the cumulative losses suffered by the petitioners for the drop in its share price from N293 on August 21, 2008 to what the petition describes as ‘a miserable N66.50 on March 26, 2008.’
Femi Otedola became the largest shareholder in AP, when his company, Zenon Petroleum Oil & Gas acquired a majority stake in the company in 2007. According to the petition, the crossing of African Petroleum shares by Nova Finance & Securities, agents to Alhaji Dangote, ‘amounted to fictitious transactions and/or devices which caused a depression and/or caused fluctuations in the market price. Further, the respondents sought from the Administrative Proceedings Committee of the Securities and Exchange Commission (SEC) ‘a declaration that the respondents’ act was done with the intention to induce other persons to sell their shares and cause a depression and loss in value of AP shares.’
When the Nigeria Stock Exchange released its finding after an investigation into the matter, Nova Finance & Securities was found guilty of the crossing of shares and fined. However, the exchange found no proof that Alhaji Dangote had instructed the firm or its principal, Eugene Anenih, to carry out the unethical acts.
Expectedly, the case has been receiving extensive coverage in the press and has been the subject of numerous posts on internet forums.
In his view, Sunny Nwosu, national co-ordinator of the Independent Shareholders Association of Nigeria (ISAN):
Somebody in his position should not do anything to undermine the capital market. The market already has a problem and it does not need anything that will bring it to further question. It is obvious that he should resign from the council.
This is a great embarrassment to the NSE members and the regulators. There is already a big question mark on the NSE and it is unfortunate that this sort of thing happened and involved those that are supposed to govern the stock exchange.
The NSE has to quickly come out with the result of its investigation because a lot of people that used AP shares as collateral for loans would have run into trouble, because banks would have called the loans as the share price fell rapidly.
Likewise, Boniface Okezie, chairman of the Progressive Shareholders Association of Nigeria insisted that:
I think the Nigerian Stock Exchange has got the whole thing wrong, if Dangote acted as an investor, and was involved in crossing shares, then it is for his own selfish reasons, and it has affected the market as a whole. I am sure it is a punishable offense by the NSE.
I would not want to believe that the NSE is afraid of Dangote, because their silence over all this is definitely sending a wrong signal to the investing public and the whole thing would keep affecting our market.
We are of the opinion that Dangote should resign from the council and forget that ambition of becoming the president of the NSE, because he has lost all the moral justification.
When the Securities and Exchange Commission published its report on the matter, it imposed a one year ban on the stock broking firm, and a five year ban on Eugene Anenih, its principal.
So far, it seems like the elements have lined up in favour with the board of AP, and concur with it on its claims.
However, a few voices have been raised about the validity of AP’s claims that the drop in its share price is a direct result of the perfidious acts of crossing its shares.
Alhaji Aliyu Wadada, chairman of the House Committee on Capital Market and Institutions has issued a press release calling for transparency from AP in a number of extant cases involving the company which his committee is investigating.
Recently, Bamidele Sanya of the Committee for the Defense of Justice and Advancement (CODJA) placed two paid announcements in newspapers drawing attention to the general downward trend of the stock market, especially the petroleum marketing sector, since last year. Sanya has also raised questions about the valuation of the company at its pre-August 2008 technical suspension price (N293), as well as the value creation differential that justifies AP’s share price outperformance of its sectoral peers and defiance of the market sell-off in its sector, among others.
The latest critic of African Petroleum is the Shareholders’ Trustees Association of Nigeria (STAN). Mukhtar Mukhtar, its president, has called on the Bureau of Public Enterprises (BPE), which supervised the sale of African Petroleum, on behalf of the federal government, to Zenon in 2007 to cancel the sale due to the failure of the acquirer to deliver on its expansion plans as described in the prospectus of its 2008 public offering.
Oddly, since the publication of its allegations against Alhaji Dangote, AP has been silent on the underlying drivers that support its pre-August 2008 technical suspension. The company has also failed to keep investors abreast of steps it is taking to seek redress. A press statement, with contact details, would go a long way to clearing the air.
For instance, in the petition to the Administrative Proceedings Committee of the SEC, African Petroleum is not named as one of the plaintiffs. Only Femi Otedola, Zenon Petroleum Oil & Gas and Luzon Oil & Gas are listed as petitioners. Does this mean that if the other party is found to have been solely responsible for the drop in the share price and a settlement is reached, shareholders in the company will not be beneficiaries, as in a class action, even though they also suffered damages, and the petition was filed by the CEO and Chairman, whose primary responsibility it is to look after their interests?
Since the scandal broke, investors have been seeking for accuracy, clarity and transparency of information, given the gravity of the issues. Yet, the company seems to be demonstrating that it does not have a coherent communications and investor engagement strategy beyond the revelation of the information. Unfortunately, an omission on this scale does more for any purported detractors of the company than the disclosure of the trading records of Alhaji Dangote.
For instance, the company’s website provides no comfort on any information related to the case or on any events in the past eight months for that matter. Ostensibly, the site has not been updated since August 20, 2008, when application documents and the prospectus for its public offering was uploaded to it. Even details of its Q3 2008 results, which were presented to the stock exchange in November 2008, are not available on the site. Clearly, such negligence does the company and its investors a mean disservice. Of equal concern is that under the About Us section, on the Our People page, only Femi Otedola, the CEO and chairman, and Tunde Falasinnu, the chief operating officer, are listed. There is no information on other board members, executive management, senior management, press contacts or investor contacts, even though, the Investors Information page advises shareholders to contact the registrars with any inquiries about their shareholding. This demonstrates a confusion between the proper function of the registrar as transfer agent, and the role of an internal investor relations person as the primary contact for the investment community. Not all inquiries are directed at shareholding, transfer or dividend information. Sometimes, an analyst may be seeking clarification on a past financial results, or an investor on access to management.
(Prior to uploading this post, we noticed that the site contained new information on the donation of crash helmets to motor-cycle riders. This was most likely uploaded on Tuesday, April 29, 2009. Nonetheless, there is still no information on the share price manipulation allegations).
At the moment, a new website is a pressing issue because the site serves as a platform and channel for communicating with investors. In fact, all paid announcements and press releases should have a link to a web page where readers can get more information.
At a time when the company needs to be in front, wooing back investors with an elaboration on the embedded value of the firm, its decision to go dark seems counter-intuitive, even illogical. Smart companies recognize the need to highlight their value in the unprecedented market situation, which has seen a decline of over 50% in the All Nigerian Share Index (ANSI) in the past year. The panic sell-off in the past year has increased the risk perception of all companies, including those with a long record of rising revenues, sustained profits and consistent dividend payments.
In the circumstances, investors have grown skeptical of financial communications that focus solely on outstanding results, without an equal emphasis on the strategy, governance, operations and risks borne to generate those revenues.
The inordinate attention paid by companies on the Nigerian Stock Exchange to results as opposed to the process of achieving those results is perhaps the most visible consequence of the absence of an investor relations culture in Nigeria.
Instead, Nigerian companies choose proxies like publicity campaigns, sponsorships and brand launches, which serve to create awareness about company initiatives or capital raising, but are inadequate long-term substitutes for creating a sustainable and appropriate valuation of the firm through balanced communications, fair disclosure and dynamic feedback solicitation from the investment community. Most likely, because of the patient discipline and long-term commitment required for a successful investor relations program, companies in a hurry to impact the share price or raise capital prefer the proxy. In an earlier post, Get on the next bus because this one won’t take you any further: Why agencies’ remedies are not an alternative to professional investor relations for Nigerian companies, we discussed the background to this situation.
According to the Canadian Investor Relations Institute (CIRI),
Investor relations is the strategic management responsibility that integrates the disciplines of finance, communications and marketing to achieve an effective two-way flow of information between a public company and the investment community, in order to enable fair and efficient capital markets.
Investor relations is diametrically opposed to stock promotion, which seeks the highest attainable share price as quickly as possible without regard to fundamental value. Unlike stock promoters, investor relations practitioners do not attempt to directly influence trading volume, liquidity or stock price.
Moreover, they do not recommend stocks or trading strategies, provide investment advice or forecast share price performance. Some promoters attempt to confuse investors by calling themselves IR consultants. It is therefore important that CIRI and its members continue to underline the distinction by clearly communicating the practice of professional investor relations at every opportunity.
Clearly, if the board of AP decides to embark on a pro-active communications campaign now, it needs to bear in mind that simply focusing on an ascent in the share price to its August 2008 levels, will be mistaken, and ultimately lead to frustration. Such communications must be well situated within the context of a responsible investor relations program that strives to be credible and achieve sustainable results.
At the strategic level, developing an investor relations program encourages management to take a critical look at a number of important factors that determine its valuation and likely stock price volatility, including:
Its investment thesis
Its significant differentiation from its sectoral and capitalization peers
Investors’ understanding of its business and sector
Investors’ perception of its business and sector
Voluntary disclosure practices among its peers and what constitutes leading practice
Analyst review criteria for assessing peers and issuing recommendations
Investment decision process of key investors in itself and peer companies
Trading [hold-sell] patterns and trends of investors in itself and peer companies.
In the paradigm of the informational efficiency of capital markets, it is an axiom that prices convey accurate information about the underlying assets. Any distortions are quickly corrected. As a result of this feedback loop from the financial markets to the real value of the firm, when there is sustained and widening divergence between the market price and the real value of the firm, based on its future cash generating potential, the informativeness of the share price declines while the market’s allocational function becomes weakened. Since a major part of the market’s allocational function is about the pricing of risk, the divergence increases the premium that investors will require to invest in the firm. In turn, this increase in the cost of equity capital reduces the firm’s ability to raise funds for projects that have attractive net present values, in effect, perverting the investment decision making process at the firm.
To address this, there are two tasks confronting managers as agents:
Reduce the information asymmetry about the risks of the investment that exists between investors as principals, or providers of capital, and managers as agents
Provide assurances that the management of assets are governed by rules that align the interests of managers with those of investors.
Recognizing that regulator mandated corporate disclosures such as annual and interim reports are insufficient updates for investors, companies make voluntary commitments to investor relations programs, which rather than focus on legal compliance with securities regulators’ rules, are targeted at the expected economic benefits of disclosure, viz, proactive communications, market intelligence, access to management, etc.
There is, however, one important difference that provides a quantum jump for investor relations, which is lacking in the other disclosure activities (annual and interim reports). In addition to its focus on the quantity, quality and timing of disclosure, investor relations also addresses the ‘how’ of disclosure. Investor relations offers companies plenty of flexibility in the format of presentation and engagement including: the use of online investor relations via the company website and other web locations including social media, press releases, analyst meetings, institutional investor presentations, investor roadshows, newspaper interviews, TV appearances for executive management, etc. This greatly increases its value and effectiveness as a bridge between companies and investors.
Still, investor relations is not a sum of activities, communications channels or content. Critical to the success of an investor relations program is the person responsible for that role in the organization. Ultimately, the judgment and discretion of the officers who head a company’s investor relations program are as important as knowledge of the channels, preparation of content and tools. Built on transparency, accuracy and credibility, an investor relations program can only get out as much as companies are willing to give. Although the SEC report on the AP share price manipulation lists B.U. Akubueze, as the investor relations officer of the petroleum marketing company, his efforts are yet to be felt.
In April 2008, exactly a year ago, AP gave a presentation to the Nigerian Stock Exchange, outlining its vision and priorities.
So thorough and convincing was the presentation that at the end of it all, the Director General of the Exchange, Professor Ndi Okereke-Onyiuke, felt justified over the new price of the stock which observers had thought was running ahead of its fundamentals.
And she did not mince words when she told the management team that ‘the facts which you have presented have justified us (referring to the Exchange and stockbrokers/operators of the market). Those who thought the price of the stock was being pushed up should see the fundamentals and have a rethink. There is no manipulation of stock prices here’.
Talking about fundamentals, the chief operating officer, AP, Mr. Tunde Falasinnu, said the actual net asset per share grew progressively from negative territory of N-96.00 in 2003, N-18 .00 in 2004 to N0.37 in 2005; rising to N3.11 in 2006 and hit sudden high of N14.99 in 2007. And it is hoped to appreciate by not less than 50 percent by the end of 2008, considering massive diversifications into more streams of businesses in the sector.
There is certainly a lot in that document to convince investors about the value and prospects of the company. Yet, since then, in spite of a public offering, the company has not presented a scorecard of its progress towards the business goals outlined under the Strategic Initiatives and Future Plans sections of the presentation.
Specifically, these covered 10 areas:
Strategic review of the business
Investment in property and plant
Increased focus on sales and marketing
Prioritization of human resources as a key element
Added support for customer service
Review of extant corporate governance structure
Regional expansion across West Africa, notably Ghana
Corporate social responsibility
Prompt reporting of results and responsive communications with investors
Recoveries drive and improved cash flow management.
Clearly, there are enough areas listed above for the company to provide information that would be helpful in reaching investment decisions.
Complementing the list above, the company needs to provide information on the following:
Its relationship with Zenon Petroleum Oil & Gas, based on reports in January 2009 about the cancellation of the merger between the two companies
The transparency and validity of the Bureau of Public Enterprises’ sale process of NNPC Pension Fund’s equity in AP to Femi Otedola
The reasons for the review of the merger
The implications of the cancellation of the merger on its business outlook and projections made in April 2008
The governance structure of the company, and in particular, the combination of both executive and supervisory roles in Femi Otedola as CEO and chairman
Its business strategy faced with growing competition
Market trends and AP’s market share from an independent source
New management members and responsibilities, with the company organogram
Effect of the economic downturn on the business and measures being taken to ensure the short-term sustainability of the business and its long-term success explained in concrete terms
The implications of the short fall in its 2008 hybrid offering on its ability to complete current projects and meet debt obligations.
In their book, Valuation: Measuring and Managing the Value of Companies (2005), the authors, Tim Koller, Marc Goedhart and David Wessels explain that for an investor communications program to be successful, it should have three core elements:
Aspirations, which should be described in financial and market terms, e.g, projections of revenue growth, profit margins, return on capital, market share, product innovation, customer penetration, etc.
Strategy, which explains how the company will achieve its aspirations in concrete and query-able terms, e.g., improvements in its supply chain, cost cutting, spin off of non-core businesses, acquisition of complementary businesses, movement up- or downstream in the value chain, etc.
Evidence, which provides investors with a window into how far down the road the company is in hitting its aspirations. This extends beyond simple financial reporting, but should cover non-financial factors and the sustainability of these results too.
AP cannot delay addressing these any longer. At the current rate, the company is at risk of losing the initiative to others, notably Bamidele Sanya and Muhktar Muhktar. The last thing the company needs is to find itself boxed into a corner of being reactive to questions.
AP must take a holistic approach to developing an investor relations program that tackles both the short-term crisis and the long-term challenges of the business with regards to information asymmetry and its effect on the company’s cost of capital. A robust IR program for African Petroleum would include events (investor road shows, presentation of results, analyst meetings, conference calls, industry trade show appearances), channels (web, print media, TV appearances for key members of the executive team), the business press, individuals (retail investors, shareholder associations) and institutions (both buy- and sell-side).
Regardless of the final verdict on the substance of the allegations, one thing is now certain: AP needs to justify the previous valuation it enjoyed circa August 2008. As we have shown, this presents an opportunity for the company to explain its business and potential to a wider audience, and then incorporate their questions and feedback into future investor communications.
If AP fails to do so, there would have been no reason for seeking and winning the love of the public in the first place. At that stage, even an extremely unlikely admission of guilt, full confession and remorseful apology by Alhaji Dangote and Eugene Anenih for the crossing of the shares plus the payment of N117 billion in damages to Femi Otedola, Zenon Petroleum Oil & Gas and Luzon Oil & Gas would make no difference to the company’s sustainable valuation or liquidity in its shares. Public sympathy and regulators’ support are not a substitute for objective investor decision-making.
Investors would simply judge that the asymmetry that exists between them and the company is too wide, and no matter the merits of the company are which are known to the managers, the markets would eventually return to aggressively discounting its shares. So the question is: Now that you found love, what are you gonna do with it? You better do something smart with it real quick. The slack hand never retains the fair lady lady.
One cannot help noticing how Niyi Meka Olowola, Oando's Head of Corp Comms, is nodding in approval. Maybe Goldman Sachs can learn lessons.04:47:49 PM January 25, 2012from HootSuite
It's at times like these companies praise heaven for media-savvy CEOs.Among Nigerian business leaders,Wale Tinubu, is easily among the best.04:46:01 PM January 25, 2012from HootSuite
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