A bitter pill to swallow for GSK minority shareholders

Coronation Fund Managers is an independent fund management company based in Cape Town. On behalf of our clients we manage some $40 billion of investment in South Africa and globally, of which almost $200 million is invested in Nigeria. We currently have $7m invested in GSK Nigeria, a position which reflects our positive view of the business, its management team and its prospects. But, we are alarmed at the recent scheme put forward by the UK parent company, GSK Plc, which owns 46 percent of GSK Nigeria. Shareholders are being asked to vote on a proposal whereby GSK Plc will pay N48 per share to other shareholders in order to increase its stake in GSK Nigeria to 75 percent. To get approval, the scheme needs 75 percent of shareholders to vote in favour. The big issue here is that GSK Plc is allowed to vote its shares on the deal.

In most developed markets, regulation expressly prohibits related parties from voting their shares in a transaction such as this. So, in its home in the UK, GSK Plc, as the related party, would not be allowed to vote and the scheme would need 75 percent approval from shareholders other than GSK Plc for the scheme to pass. This best practice ensures that minority shareholders’ interests are protected and they do not get steamrollered by the majority shareholder. GSK controls the board of GSK Nigeria (who have seen fit to recommend this scheme to shareholders) and because GSK Nigeria has a fragmented shareholder base with no other large holders, it will in all likelihood be able to get this proposal through. And it will be bitter pill for minority shareholders to swallow if this is the case.

GSK Nigeria produces household name products such as Ribena, Horlicks, Lucozade and Panadol. Despite the many upheavals and challenges in Nigeria, the company has grown both turnover and profits by over 20 percent per year for the last five years. These are growth rates that match the best we see anywhere in the world and demonstrate both the phenomenal opportunity for consumer goods companies in Nigeria as well as the quality of GSK Nigeria brands. The firm has also invested substantial amounts in the business, spending some $50m on capital projects over the period and we believe that the benefits of this spend are only now going to be realised. Just as we shareholders should expect to see an acceleration of returns, the parent company is trying to increase its stake, at a bargain price. Even at the current share price of N61 per share, GSK Nigeria trades at a substantial discount to other consumer goods companies in Nigeria such as Nestle, Unilever and Nigeria Breweries. And at the N48 per share being offered by GSK Plc, it is a steal. If the scheme is approved, minority shareholders will be forced to give up over half their current shareholding in GSK Nigeria at a 20 percent discount to the current share price and a very steep discount to what we think this business should conservatively be valued at.

Nigeria has a vibrant exchange, though with a limited number of investment opportunities comparable in quality to GSK Nigeria. Many of the highest quality listed firms are subsidiaries of global multinationals, all of which appreciate the opportunity in Nigeria and understand that it is one of the largest undeveloped consumer markets in the world. We believe there may be other multinational that would also like to own a larger chunk of their Nigerian subsidiaries. By exploiting a shortcoming in Nigerian regulations, it is possible for the majority shareholders to propose, and probably succeed in, pushing through a scheme such as this. We have seen it happen with Nigerian Bottling Company, we may well see it happen here, and we are concerned that we will see it happen again the future. If so, it will be to the detriment of all investors – individual Nigerians, local pension funds and stockbrokers, as well as foreign fund managers such as ourselves; as we are presented with a dwindling number of world-class investment opportunities.

We absolutely respect GSK Plc’s right to propose an offer to minority shareholders, but it should do so while abiding by the standards of corporate governance that would be expected of it in its home market. We call on GSK Plc to make a full and fair offer and then stand back and allow only minority shareholders to vote. And if the board of GSK Nigeria saw fit to recommend such an offer, the least it could do is fulfil its obligations to all shareholders and lay out a detailed and credible explanation of why it should be accepted. As it currently stands, both GSK Plc and the board of GSK Nigeria are doing themselves a great disservice. We urge all shareholders in GSK Nigeria to protect their interest and vote against all the proposals at the upcoming shareholders meeting. 

Townsend is co-portfolio manager, Africa Funds, Coronation Fund Managers.

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