A proposal to unbundle the real estate businesses of Nigeria’s oldest conglomerate, UAC of Nigeria Plc, is attracting positive investors’ sentiment, Capital Market Editor Taofik Salako reports
UACN Property Development Company (UPDC) Plc doubled its share price last week, reminiscent of the magical turnaround of equities. It led the rally at the Nigerian equities market with a price gain of 51.52 per cent.
In the first week of this month, UAC of Nigeria (UACN) Plc’s share price rose by 21 per cent, followed by UPDC, which rose by 12.50 per cent. This implied that UPDC had risen by about 70.5 per cent over the past two weeks, from 88 kobo to N1.50 per share. And the rally appears unbroken yet.
Details at the Nigerian Stock Exchange (NSE) show that while bargain-hunters are opening up buy orders to attract shares supply, the shareholders of the two companies are unwilling to trade away their shares. Under the rules at the NSE, for every price movement, UACN, as a medium-priced stock, requires a minimum volume of 50,000 shares and UPDC, a low-priced stock, requires 100,000 shares. The tickle for the bullish run was a proposal by UACN to unbundle UPDC and its associated company, UPDC Real Estate Investment Trusts (UPDC REITs) Plc.
New strategy
UACN, Nigeria’s oldest surviving conglomerate, has unveiled a massive restructuring programme that will see the unbundling of its publicly-quoted real estate subsidiary, UPDC and associated company- UPDC REIT.
Under the first part of the multi-structured restructuring plan, UPDC will float a rights issue of N15.96 billion to reduce outstanding debt to a level that it is serviceable from recurring cashflows. After this, UPDC will unbundle its shareholding in UPDC REIT by directly transferring the shares to its shareholders on the basis of post-rights issue shareholdings. Thus UPDC’s shareholders will become direct shareholders in UPDC REIT.
On the second part, UACN will unbundle its majority equity stake in UPDC by directly transferring its shareholdings in the real estate company to UACN’s shareholders, thus making the existing UACN’s shareholders the direct owners of shares in UPDC. UACN will also unbundle the shares of UPDC REIT allocated to it under the UPDC-UPDC REIT transaction to its shareholders, thus making UACN’s shareholders direct owners in UPDC REIT.
“On the account of UPDC’s unbundling of its interest in the UPDC REIT, post the implementation of the strategic initiatives described above, each UAC shareholder will hold shares in three entities – UAC, UPDC and the UPDC REIT benefitting from the future prospects of each,” UACN and UPDC stated in a statement on the proposed transactions.
With the completion of the rights issue and the unbundling of UPDC and UACN, UPDC will no longer own any units in UPDC REIT, UPDC REIT will cease to be an associate of UPDC, UPDC shareholders will become direct unitholders in UPDC REIT in addition to their shares in UPDC, UPDC will cease to be a subsidiary of UACN and UACN’s shareholders will become direct shareholders in UPDC and unitholders in UPDC REIT. UACN holds the majority equity stake of 64.16 per cent in UPDC, which in turn, holds 61.5 per cent majority stake in UPDC REITs. UPDC also owns major stake in UPDC Hotels Limited, a hotel and leisure company that owns Golden Tulip Hotels, formerly FESTAC Hotel, Lagos.
The boards of UACN and UPDC, which had agreed on the deals, have submitted the proposed transactions for the review of the Nigerian capital market regulators. The transactions will also need to be approved by appropriately by shareholders of both companies. Market analysts expect the transactions to scale through approval processes.
Value creation
According to the parties, the unbundling is a win-win strategy for the three companies. UACN stated that it decided on the unbundling after weighing the long-term opportunities in the Nigerian real estate sector against the fundamental differences between the cashflow profile and capital needs of UPDC and other entities in the UACN’s portfolio.
Recapitalisation of UPDC will reduce finance costs and achieve sustainable capital structure for the company while unbundling will enable the company to function in a more efficient and focused manner and reduce operational complexities. Unbundling the UPDC REIT will create additional liquidity in the REIT, which will lead to improved price discovery while UPDC’s shareholders will get immediate benefits from the UPDC REIT, a profitable and dividend-paying entity.
Already, there are ongoing efforts to strengthen the board and management of UPDC to ensure that the recapitalised and standalone UPDC retains its leadership position in the Nigerian real estate sector. Meanwhile, operations, contracts and legal obligations of UACN and UPDC will continue as normal and in line with the Memorandum of Articles and Association of the companies.
The unbundling is a major step for UACN, which has struggled to cope with the fast-paced market changes. UACN had started business in Nigeria in 1879, well ahead of the 1914 amalgamation that created Nigeria. It over the years amassed a vast structure, occupying unique position as the only group with six publicly quoted companies. The UACN Group consists of several active companies spreading through manufacturing, services, logistics and real estate sectors of the Nigerian economy. Besides UPDC and UPDC REIT, other companies included CAP Plc-the largest and most profitable chemical and paints company in Nigeria, Livestock Feeds Plc and Portland Paints and Products Nigeria Plc. UACN had acquired Livestock Feeds and Portland Paints in 2013. Other members of the group included UAC Foods Limited, UAC Restaurants Limited, MDS Logistics Plc, Warm Spring Waters Nigeria Limited, Grand Cereals Limited, and Unico CPFA Limited.
The unbundling is obviously part of the ongoing restructuring plan aimed at streamlining the conglomerate into a more efficient holding company. With the real estate in long-running depression and the peculiarity of its capital requirement and structure, UPDC has been a weak point over the years, posting losses for the past three consecutive years. Audited reports and accounts of UPDC showed that turnover had dropped consecutively from N6.34 billion in 2016 to N3.98 billion in 2017 and N2.30 billion in 2018. Net loss had widened from N1.52 billion in 2016 to N2.93 billion in 2017 and N15.04 billion in 2018. UPDC’s last dividend payment was for the 2014 business year, thus it has not contributed to the UACN Group’s dividend payment over the past four years. As an indicator of the depreciation in shareholders’ value, net assets per share had dropped consecutively from N21 in 2014 to N6.90 in 2018. Also, UPDC’s share price had depreciated from N9.50 by the close of 2014 business year to N1.91 by the close of 2018 business year. UPDC’s external auditors, Ernst & Young, had in its latest audit of the real estate company drew attention to the fact that a “material uncertainty exist which may cast significant doubt” on the going concern of the company. The auditors noted the running losses and the continuing surplus of current liabilities over current assets. UACN has been the financial backbone of UPDC, providing loans and equity supports to keep the real estate company running.
Deleveraging assets
Financing structure has been a major drawback for UPDC. Net finance costs stood at N5.03 billion and N4.76 billion in 2017 and last year. With the crash in the stock market and inability of most companies to raise new equity capital through public offerings, UPDC has been unable to raise the quantum of ‘patient’ capital required for its long-termed real estate business. The unyielding depression in the real estate sector with the attendant parlous performance of UPDC compounded the situation, leaving the many rights issue floated to recapitalise the company undersubscribed.
UACN had kept faith, picking up its rights in full. It was through the resultant dilutions that UACN’s majority shareholding rose beyond 60 per cent. Chairman, UACN Property Development Company (UPDC) Plc, Mr Babatunde Kasali, said the company has continued to work on its deleveraging strategy to reduce its debt portfolio. He noted that the company’s borrowing cost has reduced from an average of 23.5 per cent in 2017 to 18.2 per cent in 2018, although this still remains a high cost of finance for a real estate business. He added that the company successfully reduced overall level of interest-bearing debts from N19.2 billion in 2017 to N18.5 billion in 2018 while lower debt levels and more favourable credit terms helped to reduce finance cost from N5.5 billion in 2017 to N4.8 billion in 2018. The N16 billion rights issue that is a component of the unbundling plan is expected to the leverage status and put the real estate company on a stable financing position going forward. With current share price significant below net assets per share and the vast assets held by UPDC, most analysts appeared to see value in the unbundling. UPDC has major investments in not less than 10 joint ventures which hold vast real estate assets.
On its part, UACN seeks to consolidate its profitability by streamlining operations, unearth values in subsidiaries and focus on profitable businesses. UACN Plc Chairman, Mr. Dan Agbor, said one of the key elements of the strategic plan of the conglomerate is to operate as a much simpler and leaner holding company, with the main focus being on the subsidiary companies.
“We are strengthening and empowering the management and boards of subsidiary companies to drive value creation and increasing their accountability for delivering ambitious plans. Towards this end, we are carrying out a comprehensive review of our organisational structure to ensure increased autonomy and effectiveness of operating subsidiary companies,” Agbor said.
A glimpse
There are early gains already from the restructuring. Key extracts of the interim report and accounts for the period ended June 30, 2019 showed considerable growths in sales and profitability. Group turnover rose to N41.57 billion in first half of the year as against N36.98 billion recorded in comparable period of last year. Profit before tax rose by 61.4 per cent from N2.10 billion to N3.39 billion while profit after tax increased to N2.43 billion in first half 2019 compared with N1.51 billion in corresponding period of last year. UACN had appointed Mr. Folasope Aiyesimoju as the Group Managing Director of the company with effect from April 1, 2019 to lead a new generation of management. In one of the early value extraction under Aiyesimoju, UACN recently announced of agreement to sell 8.0 per cent of its equity stake in MDS Logistics Limited to co-investor, Imperial Logistics, in a deal that will increase Imperial Logistics’ equity stake from 49 per cent to 57 per cent. The transaction valued MDS at $40 million, about N12.24 billion. In consideration for the additional 8.0 per cent equity stake, Imperial Logistics will transfer selected profitable contracts to MDS and pay $2.4 million in cash. The transaction is however still subject to relevant regulatory approvals.
Aiyesimoju described the MDS transaction as an important milestone for the conglomerate noting that the deal was in line with the group’s strategy of working closely with partners in empowering best-in-class management teams. According to him, since the commencement of the partnership in 2013, the group has been impressed by Imperial Logistics’ operational excellence in warehousing, distribution and transport.
Investors may also be considering historic value creation from similar unbundling in the market. In the aftermath of the decision of Central Bank of Nigeria (CBN) directing commercial banks to either adopt a holding company structure or sell their non-bank subsidiaries, United Bank for Africa (UBA) Plc had decided to unbundle its non-bank subsidiaries through direct transfer of shares to shareholders. These resulted in the creation of United Capital Plc and Africa Prudential Registrars, two publicly-quoted companies and Afriland Properties Plc, three companies that have delivered significant values to shareholders since creation. Shareholders of UBA were allotted shares in the three companies, in what the market termed a three-for-one deal.
As the UACN-UPDC-UPDC REIT unbundling processes move through approval and implementation stages, bargain-hunters will surely keep up the bids to take positions in the emerging companies.
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