Listed fashion retailer Deacons East Africa is likely to authorise the creation of new shares as it seeks to revive its employee share ownership plan (Esop) in the coming weeks.
The new entrant at the bourse has issued almost its entire stock of authorised shares, leaving the firm little room to distribute additional shares either to the Esop or to capital-raising ventures such as rights and bonus share issues.
The firm has issued 123,558,228 shares, equivalent to 99.96 per cent of its total authorised share capital of 123,600,000, leaving only 41,772 shares unalloted to shareholders. At the current price of Sh15 a share, that would only amount to Sh627 million in value.
The company had established an Esop in 2010, but the programme was discontinued earlier this year ahead of the listing with 1.1 million having already been taken up by employees. In the same year, it put its shares in the over-the-counter market.
“I am hopeful that before the year ends a new Esop programme will be proposed and adopted by the board of directors,” said Deacons chief executive officer Muchiri Wahome.
The company is planning to start structuring the new Esop immediately, though it may take time before all the approvals are finalised.
Stock market experts say the process of creating new shares for an Esop should be straightforward, requiring only approval at an annual general meeting (AGM).
“They have an AGM each year, and like all the other companies if they decide to have something like a rights issue, or Esop, they will simply create new shares. It is easy to do because these things are prepared well in advance,” said Kestrel Capital chief executive Andre DeSimone.
Share split and bonus
Deacons set up the first scheme for permanently employed staff in October 2010 with a total of 640,000 shares that were held in a trust through a law firm. The employees bought these shares progressively through a checkoff system on their salaries.
The company effected a share split and bonus issue in 2012, which raised the number of shares in the scheme to 2.56 million.
By the time the scheme was closed effective March , employees had exercised their options on 43 per cent of these shares, leaving 1.46 million on the table.
Mr DeSimone however said that the company can raise cash for its own operations in the short term through debt rather than creating new shares.
“For raising new capital, they have capacity to take on new debt in the near term. But down the road, if they decide the next level of expansion requires additional new funds, they may opt for an increase in authorised shares,” said Mr DeSimone.
Should it become necessary, a share split would also be straightforward given that the company’s share retains a par value of Sh2.50, which can be split down several times over the years.
Two listed firms, Safaricom and Kenol Kobil, have shares which carry a par value of five cents, indicating the number of multiples that the shares of a company having a par value in excess of Sh2 can be split into.
The Capital Markets Authority has currently licensed 11 Esops for listed firms, including the four largest companies by capitalisation—Safaricom, EABL, Equity Bank and KCB.
Most of the Esops in Kenya have come up within the last two decades as a primary way of talent retention and motivation, whereby employees are given a sense of ownership of the firm.
As a reward and loyalty system, Esops are structured to take into account the length of service of an employee, vesting after a period of service after which the employee is free to sell his or her shares.