The document discusses investor sentiment in Nigeria's equity market following GlaxoSmithKline's acquisition deal, which mirrors issues that arose from the Nigerian Bottling Company delisting in 2010. It notes the market lacks depth outside of banks and a few large companies. For the market to reach its $1 trillion target, mergers and acquisitions need strong regulation and to adopt global standards to attract more foreign investors. Currently retail investors are wary of the GSK deal terms and timelines. Overall the market requires structural reforms and diversification with more utility sector listings to develop sustainably.

1. CDL Research
1 July 16, 2013 Nigeria Equity Note
Investor Angst With GSK Nigeria Deal: A reflection of
weak market depth
The GSK deal raises some of the same questions that were raised during the Nigerian Bottling
Company (NBC) delisting in 2010/2011. Unfortunately these questions have not been answered ever
since. If we need to achieve the Nigerian Stock Exchange’s $1trillion market cap target for 2016, then
the Nigerian market must adopt global best practices. Mergers and acquisitions in Nigeria must be
guided by a strong regulatory framework which must converge with the global rule books. This will
also buoy the interest of foreign portfolio investors especially those who seek to go long in the
Nigerian market.
GSK is currently trading at about N67 which reflects a downside to investors of about 28% from the
N48 that the parent is offering. This implies the parent would have shored up its shares to the 75%
target at a discount to current market valuation. This could partly be as a result of the time lag
between the announcement and the execution of the deal. In November when the deal was announced,
GSK was N39.38 reflecting a 22% upside to the offer price. This led to a buying spree and the stock
eventually became overbought.
Going forward, we need clear cut rules that govern situations like these. This same scenario played
out with the NBC deal. An announcement leading to a rally in the prices and then the stock becomes
overbought and investors who have bought at the rich valuation feel short changed.
We envisage a repeat of the NBC deal. The regulator may eventually seek an arbitrage role between
the parties and we may eventually see the parent upping its offer price to reflect current market
realities but for now we gather some investors especially retail investors who do not have the clout of
institutional investors have started booking profits on the stock. Retail investors are also weary that it
will take a while to receive the warrants thus we may see some more sell downs from this cadre.
However, such sell mandates may not be weighty enough to even cause a minor blip in prices. The
real losers in this deal will be those who have purchased at the N60 – N67 levels.
Overall, investor sentiments on the GSK deal seems to betray other underlying frustrations in the
Nigerian market. The Nigerian equity market simply lacks depth! Outside the banking stocks, there
are just a few choice names. The bulk of these names are foreign multinationals. The Dangote and the
UAC family (parent and three subsidiaries) are still the biggest domestic non-banking names within
the NSE. Dangote Cement alone represents over a quarter of the entire value of the Nigerian equities
market. The Dangote names on the NSE represent about 30% of the entire market value thus exposing
investors to undue levels of concentration risk. It was this same concentration risk that exacerbated
the market crash of 2008/09 when banks were over 55% of the entire market’s value and First Bank
was the market’s bellwether.
Jimi Ogbobine
jogbobine@cdlnigeria.com
+234 277 8218

2. CDL Research
2 July 16, 2013 Nigeria Equity Note
Charred investors still hurting from the crash of 2008/09 in a bid to avoid the errors of the past may
have sensibly reduced their exposure to the banking sector this time around. This is why the rally in
Q1 2013 has been led by the consumer goods companies. Nevertheless, a bubble will eventually yield
to a correction irrespective of the sector. We are gradually seeing a replay of2008/09 but with the
protagonists and antagonists exchanging roles. While the banking stocks are now at a discount,
investors may have overpriced the fundamentals of the consumer goods names. Thus making a
correction in names like PZ, Cadbury and Nestle inevitable. However, the corrections may be
moderated by the weak public floats of some of these stocks. In prior price corrections in the Nigerian
market, we have seen the illiquidity of these stocks leading to a preservation of value. However, the
low dividend yields may ultimately force a rethink especially when banks like First Bank and Zenith
seem to offer higher growth prospects for value investors.
In the long run, the market will require some form of structural correction and diversification to
sustain investor confidence, provide capital to entrepreneurs and normalise this regular boom-bust
cycles. There is a need to diversify the sectoral exposure on the NSE and bring in more non-cyclical
stocks especially within the utilities space. Analysts have often classified the likes of Nestle and
Dangote Sugar as defensive stocks because they deal in food related products which will always be in
demand by consumers irrespective of the economic cycle. While the beta (a measure that indicates the
correlation of a stock to market swings) of Nestle at 0.5 seems to justify this defensive stock tag
signifying it is negatively correlated to the market, Dangote Sugar’s 1.2 beta reflects significant
volatility compared to the market. Overall, the consumer names on the NSE are not the typical
defensive stocks.
By selling off the government owned assets in the power sector without seeking to diversify
ownership through the capital markets, Nigeria may have missed out on yet another golden
opportunity to exploit the gains of public listing for collectively owned assets. The first of such
opportunities may have been in the port concession deals of 2005/06. Rather the hue and cry was
focused on conscripting private concerns within the telecoms and oil and gas space to the markets.
Bringing more companies to the NSE must not be done in a knee jerked manner. It must be executed
in a thoughtful manner if it is to be sustainable, lest we exhume the ghosts of the failed Indigenisation
Policy. This is why we welcome the planned discourse by the management of the NSE on July 16th
to examine the role of the capital market in developing the utilities sector. With some of the big
names within this niche space listing on the NSE, the $1trillion target could be fulfilled even well
ahead of time.
The shortage of
good names
amongst real
sector stocks raises
bubble fears
within the sector
Nigeria in search
of defensive names
on the stock
exchange
Nigeria is still
waiting for the
first listing from a
utilities company

3. CDL Research
3 July 16, 2013 Nigeria Equity Note
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