Marketing services firm WPP Scangroup #ticker:SCAN has made preparations to write off up to Sh4.7 billion investments in its subsidiaries.
The company has transferred the amount from its share premium account to its merger reserve account from which it can absorb the impairments without hurting its earnings.
“The company wishes to inform its shareholders and the public that it has altered its share capital structure by transferring an amount of Sh4.7 billion from its share premium account to a merger reserve account,” Scangroup said in a statement accompanying its results for the year ended December.
“The alteration does not affect the statement of profit or loss of the group and company and does not reduce assets of the company or the group.”
The manouvre has seen the share premium account –representing the value of shares acquired by shareholders above their nominal price— drop to Sh4.4 billion in the review period from Sh9.1 billion in 2020.
Share premium cannot be distributed to shareholders and its use is restricted mainly to issuing of bonus shares.
It can however be transferred to the merger reserve which a company is allowed to create after fulfilling certain conditions in the Companies Act, 2015.
Scangroup has been reviewing its sprawling investments including interests in multiple subsidiaries in Kenya and other African markets, bracing itself for potential writeoff of part of their values.
The reappraisal came after the firm’s founder and former chief executive Bharat Thakrar fell out with representatives of the majority shareholder WPP Plc, leading to his departure from the company in March last year.
“The benefit of the merger reserve is that it could be used to absorb any impairment in relation to the value of the acquired entities. Any impairment would normally be charged to the company’s profit and loss statement and could result in the elimination of the distributable reserves of the company,” Scangroup said earlier.
“If the company’s distributable reserves are depleted, this would mean that the company would not be able to pay dividends to the shareholders in the short to medium term.”
Scangroup made a net loss of Sh37.9 million last year, reversing a net profit of Sh382.8 million in 2020 which was largely derived from a one-time gain of Sh2.2 billion from the sale of its former subsidiary Kantar Africa.
The company incurred a Sh172 million tax bill which was higher than its pre-tax income of Sh134 million, an outcome it attributed to expenses that could not be used to defray its tax obligations.