Customs Street Advisors

The recommendations of the Dotun Suleiman Committee for the Review of Capital Market Structures and Processes have received a lot of attention in the press. As a result of public concerns over certain perceived abuses and improprieties on the Nigerian Stock Exchange, those  recommendations which  touch on the oversight functions of the Securities and Exchange Commission (SEC) over the exchange have been in the spotlight. However, one recommendation, so far adopted, that has received far less attention, is the introduction of book-building method in securities sales transactions. Known as Rule 78(c) it will have significant long-term impact on the Nigerian capital market through its potential to fundamentally change the content of public offering communications, structure of ownership of companies, surveillance of corporate governance, review of corporate performance and the quality of issuer-investor relations. In this post, we examine the trends that have led to the rise of institutional investors in Nigeria and why issuers may actually prefer them at first countenance. Then we discuss the likely implications of their established dominance on share registers and its implications for  companies planning to raise capital.

In a recent critical essay on the dereliction of duty by US money managers in the supervision of public companies  whose securities they buy and hold on behalf of private citizens, John Bogle, founder of the Vanguard Group, the giant fund manager, underlines the risks to the financial system as markets have gradually but surely transformed from owner-governed to agent-dominated systems. However, beyond his criticism of the ineluctable trend to greater ownership of corporations by fiduciaries, Bogle identifies their central role in contemporary capital markets, not simply as conduits of capital, but as watchmen of corporate governance and performance. Read More…

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.’

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In this presentation,  Robert Passarella offers engaging insights on how the internet is changing the way equity research is done, and its implications for companies, issuers, investors and markets in general.

When clients of CSL Stockbrokers received a research report on the Access Bank secondary offering in their email in August 2007, many were shocked at its contents. In the report, Jude Fejokwu, head of research at the firm, raised blazing red flags over the bank’s treatment of goodwill, audit committee membership of both the CEO, Aigboje Aig-Imoukhuede and his deputy, Herbert Wigwe, share price manipulation in the run up to the offering and sharp practices in its financial reporting. Almost immediately, his employers, which had strong investment banking relationships with Access Bank, sent emails to recipients of the research report, announcing that it had dismissed its head of research for the preparation and unauthorized distribution of the document. CSL, which disclosed its business relationship with the issuer in the email, made clear that the analyst’s claims using the imprimatur of the firm were unacceptable. In this post, we question whether the firm’s reaction and the dismissal of the head of research was a conflict-of-interest case or not, and we suggest an alternative for how CSL and Access Bank should have handled the case.

Analyst independence and analyst-issuer relations have been live issues even before Eliot Spitzer, the former attorney-general and later governor of the state of New York, revealed that most US tech stocks which were presented to the investing public as safe, sound and solid by Wall Street investment banks during the internet bubble (1995 - 2001) had very weak fundamentals. Analysts at the bulge bracket banks which brought these companies to the market knew of these weaknesses, but chose not to disclose them for fear of losing the lucrative fees that their investment banking colleagues depended on. In a nutshell, the boom had been fueled by fraud.

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