Money Markets
Safaricom’s bid to reduce share float sparks debate
The expectation is that if Mr Michael Joseph, the Safaricom CEO, mopped up the excess volume of shares it would help boost the firm’s price on the Nairobi Stock Exchange. Photo/FILE
It is more than a year since Safaricom went public, but the valuation of the mobile phone company continues to generate heated debate among investors.
With the company having lost a quarter of its value since its Sh50 billion IPO debuted on the Nairobi Stock Exchange, scepticism is rising among investors over the future prospects of the share price.
In the last couple of weeks, however, stockbrokers and fund managers have been showing growing enthusiasm for a plan that seeks to reduce the number of Safaricom shares in the market — a process known as consolidation — in a bid to shore up the share price.
Supporters of consolidation argue that there are too many shares in the hands of 800,000 small investors who have been selling their tiny holdings, causing volatility on the Safaricom counter.
“That is the best way for Safaricom to go. The number of shares in the market overwhelms everybody and puts pressure on the price,” says John Wakiumu, the head of fund management at Amana Capital.
He argues that with the Sh10 billion Safaricom shares out in the market, a good chunk of which remains in the hands of retail investors, it has been difficult for institutional investors to accumulate any meaningful positions on the counter.
The expectation is that if Mr Michael Joseph, the Safaricom chief executive, mopped up the excess volume of shares by issuing certificates that show, for instance, that an investor who owned 1,000 shares each worth Sh1 (or Sh1,000) with a new one showing that he or she owns 100 shares each worth Sh10 (or Sh1,000) this would help boost Safaricom’s price on the NSE.
This is because consolidation reduces outstanding shares but leaves the value of the company unchanged, so the economic reality does not change for investors.
Analysts argue that such a move would encourage rich investors and big portfolio managers such as pension funds and foreign hedge funds to get to the Safaricom counter.
Consolidation, the analysts argue would benefit investors in a number of ways.
Because investors in Kenya pay two per cent commission for trading shares on the value of the transaction, a consolidation would therefore lower shareholders transaction costs per trade.
“Consolidation needs to happen for the market to recover,” says Mr Nkoregamba Mwebesa, the chief executive officer at CfC Stanbic Financial Services and the former CEO of the Nairobi Stock Exchange.
Share consolidation has not happened in Kenya but in the recent past the market has experimented more with share splits to make some companies more attractive to small investors after their share prices rose too high.
Companies usually consolidate their shares in order to make them more attractive to institutional investors.
Some investment funds are prevented by their guidelines from putting money in shares that trade below certain price levels such as the so called penny stocks that trade below $5 in the US (which works out to Sh400).
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