Shareholders early this month voted to return Tiger Branded Consumer Goods (TBCG) Plc to its former name, Dangote Flour Mills (DFM) Plc. With the return of Dangote Industries Limited as the majority core investor, new capital injection, reconstituted board and a new management team, TBCG is now one of the most-sought after equities on the Nigerian stock market. Capital Market Editor Taofik Salako looks at the dynamics driving the flour-milling company.
Tiger Branded Consumer Goods (TBCG) Plc, now renamed Dangote Flour Mills (DFM) Plc, is playing the lead contrarian stock at the Nigerian stock market. Against the odds of the lingering downtrend, the beleaguered investors in TBCG have found new impetus in the ongoing reorganisation of the company. TBCG recorded the highest gain of 20.87 per cent last week at the Nigerian Stock Exchange (NSE). The average gain at the market during the period, as measured by the benchmark All Share Index (ASI), was 0.53 per cent. The NSE Consumer Goods Index, which tracks TBCG’s consumer goods sector, declined by 0.83 per cent.
At the opening of the market on Monday, the ASI indicated that an average investor in the Nigerian stock market has so far lost 13.24 per cent of his portfolio. Average year-to-date return stood at -13.24 per cent. Consumer goods stocks were the hardest hit group. The NSE Consumer Goods Index carried average year-to-date return of -21.43 per cent, the highest by any sectoral or group index at the stock market. This implies that average investors with a portfolio consisting mainly of consumer goods have lost more than one-fifth of their portfolios. Investors in TBCG have been some of the exceptions. With average year-to-date return of 146.02 per cent, the only positive return by any flour-milling stock, TBCG stands so far this year as not only the exceptionally rewarding stock in the consumer goods sector but in the entire stock market.
This month has particularly seen TBCG soaring with new zest. The annual general meeting on April 7 was the climax of several corporate changes that sought to reclaim the former DFM and restore it to its previous standing as one of the most attractive stocks to dividend-minded retail investors. From a modest start as a division of Dangote Industries Limited in 1999, DFM was incorporated and began operations as a public limited liability company on January 1, 2006. It was listed on the NSE in 2008. It sustained considerable growth and regular dividend payment over the years until 2012 when Dangote Industries Limited (DIL) sold the majority equity stake to Tiger Brands Limited, South Africa’s largest food company.
Purchase and repurchase
Dangote Group’s DIL in 2012 sold 63.35 of its equity stake in DFM to Tiger Brands in a $181.9 million deal. The deal saw transfer of 3.17 billion ordinary shares out of Dangote Group’s 3.67 billion ordinary shares of 50 kobo each in DFM to the Tigers Brand. The deal then was approximately valued at more than N28 billion, according to prevailing exchange rate. The transaction however still provided for Alhaji Aliko Dangote, President of the Dangote Group, to retain his chairmanship of the board of the flour mills. The executed Share Sales Purchase Agreement (SSPA), which articulated the terms under which the sale was consummated with Tiger Brands, provided that DIL will retain a strategic interest of 10 per cent of the total issued ordinary share capital of DFM for a minimum period of five years after implementation of the transaction during which the Group will have the right to appoint two directors to the board of DFM, with Alhaji Aliko Dangote continuing as chairman of the company. Barely two years after the acquisition, Tiger Brands had in 2014 written off about half of its investment in the former DFM. Tiger Brands impaired DFM’s value by 849 million rand, about $82 million, because of what it described as “underperformance” and “excess milling capacity that continues to increase in the Nigerian flour market”.
For nearly four years, DFM under Tiger Brands struggled with losses. External auditors to TBCG- Akintola Williams Deloitte, underscored the dire state of the flour-milling company in the latest audit, expressing worries that accumulated losses and continuing decline in operational performance that had wiped out shareholders’ funds could threaten the survival of the ailing flour-milling company.
In the latest audit of the group, the external auditors noted that the group had accumulated losses of N23.1 billion and a negative equity of N3.1 billion by the year ended September 30, 2015. “These conditions indicate the existence of a material uncertainty which may cast doubt on the Group’s ability to continue as a going concern,” the audit report stated.
Key extracts of the audited report and accounts of TBCG for the year ended September 30, 2015 showed that the group recorded a net loss after tax of N12.68 billion in 2015, a double on a net loss of N6.28 billion recorded in comparable period of 2014. Turnover had increased from N41.27 billion in 2014 to N48.03 billion. Gross profit also rose from N3.21 billion to N4.47 billion. But a combination of interest expenses, related party expenses and administrative costs continued to undermine the company’s performance. Operating loss rose from N6.43 billion to N8.58 billion. Loss before tax thus jumped to N12.47 billion in 2015 as against N9.29 billion in 2014. The group’s total assets declined from N54.8 billion in 2014 to N49.35 billion in 2015. Conversely, total liabilities rose from N45.19 billion in 2014 to N52.43 billion in 2015.
Turning point
After nearly four years of successive losses and impairing of assets and with losses and frustrations building up on all sides, Tiger Brands, which had then just renamed DFM as TBCG, in November 2015 announced that it would no longer extend funding to the struggling Nigerian subsidiary, in a major boardroom crisis that saw the scurried exit of Alhaji Aliko Dangote and some Nigerian directors including Mr. Olakunle Alake, Mr. Asue Ighodalo and Mr. Arnold Ekpe from the board of TBCG.
Chief executive officer, Tiger Brands Limited, Peter Matlare explained that Tiger Brands had made significant investments in TBCG but the company continued to struggle with losses, which brought the board of Tiger Brands to consider either of two options of further recapitalisation or to find alternative option, the board subsequently settled for alternative options.
He explained that the foreign core investor believed it made the right decision when it acquired the majority stake in the former Dangote Flour Mills (DFM) in 2012, but subsequent events impacted negatively on the fortunes of the company.
“Hindsight is always a perfect science! At the time, it was the right decision but we could not have anticipated the global economic circumstances which would impact the business. The challenges which have faced DFM include significant over capacity in the industry, the impact of low oil prices and the devaluation of the Naira against the US Dollar, and could not have been foreseen. The inability of the company to pass on cost increases to the market has contributed significantly to the losses. Since its acquisition in 2012, the performance of the business has been disappointing, despite a number of proactive steps taken by Tiger to improve the situation,” Matlare stated.
Faced with the dire situation of outright liquidation and bankruptcy, Tiger Brands considered many offers and options and on December 11, 2015 reached agreement with DIL to resell the troubled flour-milling company to DIL. DIL said the decision to “buy” back its former subsidiary on the need to prevent the company from going under and save over 3,000 jobs of Nigerians. While some stakeholders have questioned the rationale behind the investment decision by DIL, sources close to the Dangote Group said the company had to consider the repurchase of TBCG so as to keep the company as a going concern, which preserves value for the minority retail shareholders. The move also secured direct employment for over 3,000 employees. “Going by every indication, the future of the company was very doubtful and that was risky for the employees which are over 3,000 Nigerians apart from others who benefit from the company’s services through other ancillary services. The return of DIL is therefore a big relief and good decision to save the jobs of the staff of TBCG,” a Dangote Group source said.
With approvals of capital market authorities in Nigeria and South Africa and in line with the terms of the repurchase Share Sale Purchase Agreement (SSPA), Tiger Brands subsequently transferred and sold its 65.66 per cent majority equity stake in TBCG to DIL for a nominal consideration of $1. The South African majority core investor also absorbed N15.76 billion in debts. In consideration for the transfer of the 65.66 per cent equity stake to DIL, DIL injected N10 billion in form of a convertible shareholder’s loan into TBCG. The convertible loan implies that DIL, at its option, will automatically have higher majority equity stake whenever it decides to exercise its convertible option. “Tiger Brands Limited will transfer/sell its shares (3,283,277,052) to Dangote Industries Limited for a nominal amount ($1) in consideration for Dangote Industries Limited injecting N10 billion in January in the form of a convertible (at lender’s option) shareholders’ loan,” according to the SSPA. Besides, “Tiger Brands Limited’s loan to TBCG of N10.25 billion will be extinguished by way of debt forgiveness to the company” and “Tiger Brands Limited will assume the Stanbic IBTC debt of N5.51 billion and pay up the outstanding amount due to the bank”. A cross deal for the transfer of more than 3.28 billion ordinary shares of 50 kobo each of TBCG from Tiger Brands Limited to DIL was struck on the NSE. The cross deal was struck through the negotiated cross deal window of the NSE at N1.24 per share.
Back to the basics
With the transfer of the 65.66 per cent equity stake of Tiger Brands, DIL, which previously held 10 per cent equity stake, now controls 75.66 per cent majority equity stake. Dangote Group then moved swiftly to rebuild the flour-milling business, moves that appeared to have won investors’ confidence. In a move that further strengthened the corporate independence of the company, Alhaji Aliko Dangote relinquished the traditional role of chairing the board of the subsidiaries of the group, and Mr. Asue Ighodalo was appointed as chairman of the new DFM. DIL also moved to strengthen the executive management with the appointment of two executive directors. Alhaji Ahmed Yakasai, a long-standing corporate expert that has worked across the chain in Dangote Group, was in March 2016 appointed the executive director, supply chain. He also doubles as deputy chief executive. Yakasai, until his appointment, was the special assistant, projects office of the Dangote Group President. At the same time, MS Halima Dangote was appointed executive director, commercial. Halima Dangote, a London-trained marketing specialist, is a member of the DIL executive team. These appointments underscored the fact that the Group was putting trusted hands in the reclamation plan for the ailing subsidiary.
Head, research and investment advisory, SCM Capital Limited, formerly Sterling Capital, Mr. Sewa Wusu, said the reconstitution of the board and management of the new DFM might have inspired investors’ confidence.
“I think the move may be creating positive sentiments on the prospects of transforming the company from the current losses. Asue Ighodalo is a lawyer and a consummate corporate performer and may want to very quickly return the company to profitability,” Wusu noted.
Besides, DIL has injected new capital into the new DFM. Ighodalo said in addition to the new capital, the company’s processes and management have been strengthened in order to stabilise the business and place it on a sustainable path aimed at creating value for its stakeholders. “We are turning the corner,” Ighodalo assured shareholders and other stakeholders in his address at the company’s general meeting earlier this month. He said the company has continued to receive excellent patronage from its customers, notwithstanding the challenges being faced by the company.
With the renaming and emergence of DIL as core investor, DFM is now a member of the Dangote Group, the most capitalised quoted business group in Nigeria with four major companies including Dangote Cement, cement; Nascon Allied Industry, salt; Dangote Sugar Refinery, sugar; and DFM, flour. It has several unquoted subsidiaries that are involved oil and gas, telecommunications, fruit drinks and transportation among others. Head, financial advisory group, GTI Capital Group, Mr. Hassan Kehinde, said the reintegration of the flour-milling company into Dangote Group appeared to be reinforcing investors’ confidence. “We are confident a turnaround is likely to happen given the pedigree of Dangote Group. As investors, we are expecting better returns. We have confident in the new management and board, they are persons of proven expertise,” national president, Constance Shareholders Association, Shehu Mikail said. This optimism appears to be at the core of dynamics driving the new DFM.
