Matters Arising as Otedola Acquires 5% Interest in FBNH

It has been a nail-biting period for stock market observers and investors as FBNH, Nigeria’s oldest financial lender fell into a pot of contesting business interests, with one of Nigeria’s wiliest business executives making a play for corporate control

In a move noticed by Proshare after its report on FBHN’s Shaky House of Cards, Nigerian businessman and former chairman of Forte Oil (now Ardova Plc), Femi Otedola acquired a major stake in First Bank of Nigeria Holdings. The acquisition followed an intense buying spree over a three-week period (and the large share purchases appear to be continuing). 

Given the number of shares acquired at the different periods and the averaging down of acquisition cost for the earlier large purchases and the premium paid subsequently, Otedola would have spent upwards of N30bn. The play cards for the control of Nigeria’s oldest financial lender have cost a bundle and raised issues around the accuracy of the claim by the Holdco that it has 99% free float and that no single investor has more than 1% equity stake, as its reports presents.

So far, local and foreign investors have been treated to a bouquet of price gains despite no fresh information on FBNH’s operating results for Q3 2021. In an article titled “FBNH Investors Chase Value – Understanding the Holdco’s 34.78% Share Price Rise in 2 Weeks”, Proshare analysts had noted that after shuffling along a neutral price corridor for the better part of July and all of August and September 2021, FBNH’s shares soared in the first two weeks of October.

Indeed, as of October 14^th, 2021, the holdco’s share price had risen to N11.75, a rise of 44.67% compared to the N7.5 at the beginning of the month. The reason for the rise was clearly that of a strategic investor move as mentioned in the article aformentioned. Analysts had noted that the replacement of the bank’s board by the CBN open up and spurred investing interest by investors who identified a hidden value opportunity, especially after the release of Proshare’s well received “100 Days After CBN’s Board Removals: FBNH’s Shaky House of Cards” report (see chart 1 below). 

 The Proshare Research and Intelligence Unit had, in alluding to the existence of strategic investor interest, stated that “the rise in traded volumes of the financial Holdco and the upward rise in trade values seem to hide another unfolding story guarded against the public display. The fact that FBNH’s memorandum of agreement and articles of association (MEMART) did not allow for a ‘poison pill’ clause that could forestall the acquisition of its shares in one fell swoop seemed very likely that the increased buying interests were those of a strategic investor”.

The Morning After…

As Otedola ramped up his strategic interest, the heat seemed to lighten as the daily volume traded in the Holdco’s shares had, by Tuesday 18^th of October, fallen from over 602m units on Thursday to just 67m. Likewise, as of Thursday, October 21, the Holdco’s share price had fallen to N12.1 from the peak of N12.7.  

Instructively, FBNH shares have over the years slumped steadily, from an average of N32.03 in the early 2000’s to just a little of over N12 at the turn of the decade. The Holdco’s share price appears to have gained from the rise of a phoenix; the Femi Otedola’s audacious charge for a financial institution takeover based on his calculations on the firms value beyond the crisis. The pertinent question was therefore, to what end?  

The Premise of  Anticipation

“There is a high-stake share acquisition manoeuvre, and we may have some idea of who the buyer is, but we have no idea where this is going – a price gain investment move or a build-up of insider equity? It remains a mystery” – an Insider at FBNH who craved anonymity.

The evolving sequence of events seemed well set up for Femi Otedola; indeed, back in 2019, the business mogul sold off 75% of his stake in Forte Oil Plc based on his reading of the industry vis-a-vis the economy and the public wondered what was up. The energy company had had a market capitalization of N64bn. Having received payment to transfer his 75% equity interest to Prudent Energy Services Ltd., Otedola was said to have invested $1bn in the Geregu Power plant. Still, just when analysts felt that he had fully turned his attention to the power and energy business, the maverick businessman masterfully adopted stealth to acquire a significant equity stake in FBNH.

It would appear that he had his eyes set on a financial Holdco for some time but waited for the right time to make a move on an institution with value accretion. The opening was provided by the steps taken post-CBN’s move to resolve the governance challenges at the bank and the new board’s resolve to address its NPL’s portfolio. In other words, preparation met with opportunity, and the result was inevitable, winning. Otedola, along with other shareholders, can do one of two things: push the Holdco to be more efficient and raise its economic value and market price, thereby improving return on equity (RoAE) or put pressure on the existing boards to improve sustainable performance or buy him out at a premium; a strategy well-used by 84-year-old American corporate raider Carl Icahn in the 1990s.

The Implications:  Living happily ever after?

Changes in the Holdco’s board and Ownership Structure

Otedola’s determination and clarity of purpose may prove effective in altering the bank’s dwindling market positioning. The power sector entrepreneur has a reputation for turning businesses around and transforming their operations (AP, later to become Forte Oil and Geregu Power, offers insight into this context).  Upon his departure from Forte Oil, he gave the market a clue into his mindset when he said: “A few years ago, my team and I embarked on an arduous task of transforming a moribund petroleum marketing business, African Petroleum Plc (formerly British Petroleum) into Forte Oil Plc; a leading integrated solutions provider with solid footprints in downstream petroleum marketing, Upstream Services and Power Generation and one in which we built intrinsic value to the benefit of our shareholders.” 

When he formally takes a seat on the board of FBNH, Otedola would bring his previous turnaround experience to bear on the operations of the Holdco. Although his most notable successes were in Oil Marketing, Otedola’s past business ventures cut across several other sectors from finance to investments and trading. The Otedola’ nudge’ could lift the quality of FBNH’s board decisions and project execution commitments. 

Other changes expected at FBNH include:

• Adoption of a bolder machine learning (ML)/artificial intelligence (AI) architecture to deliver on goals
• A review of operating expenses/revenue expectations
• A review of FBNs loan book to tidy up toxic assets
• An immediate review of corporate strategy
• Exploration of emerging business opportunities (Blue Ocean dominance);
• Upgrade of customer UX/UI; and
• Clarity over share-ownership Structure of the Holdco

Meanwhile, the powerplay expected in the aftermath of Otedola’s ‘involvement’ at FBNH is already the subject of some permutations amongst analysts. Recall that as of December 2020, the largest shareholder was Oba Otudeko, who held 5,895,264 direct shares and 532,075,839 indirect shares, which amount to less than 5% of the Holdco’s shares. Oye Hassan-Odukale owned the second largest number of shares  

Yet, there are quite a few undercurrents that to address. The single-factor media coverage of the past few days misses a crucial point. The move by the new investor has opened up a fresh vista that further interrogates the bank’s governance practices that led to the CBN takeover and opened up an opportunity to resolve legacy issues and new matters arising, left unaddressed.

Matters Arising – FBNH and The Need for Second Looks

Otedola’s move on the shares of FBNH has opened up a floodgate of questions:

• In its 2019 and 2020 audited financial results, the board and management of FBNH claimed that no individual shareholder had more than 5% equity in the institution and that FBNH had over 99% free float (shares available for free market trading and not owned by an individual or institutional block interest). The recent claims coming out of the woodworks from an existing shareholder put this claim under question as both cannot hold themselves true to a governance consistency test. Are we to believe the claim or the recent letter to the CAC over a stakeholding that purports to have been in place as of the 2020 year-end?

A few issues to address:

• This will be a challenge for the Securities and Exchange Commission (SEC) of Nigeria, who would have to step in to enquire, investigate and consider a sanction on the Holdco for misrepresenting its shareholding structure.
• Would the NGX be sanctioned for the lack of due diligence?
• Is the Central Bank of Nigeria (CBN) vicariously liable for allowing a financial institution to misrepresent its material information to the stock market and minority investors?

• Concerning the shares of Tunde Hassan-Odukale, as revealed in a yet to be formally acknowledged letter to the Corporate Affairs Commission (and not to the market); a few issues need to be addressed and the clarification provided to the market, viz:
  • When was a 5% stake disclosure made to the market as part of the post-listing rules?
  • Which entity in FBNH has 5% or more shares undisclosed to the market?
  • How appropriate is it to attribute Leadway Assurance Pension Fund’s 1.05% investment in FBNH to an individual?
  • While the latter is not a deal-breaker, establishing if this is acceptable practice is pertinent.
• The more disturbing issue must be raised about the integrity of accounts released by FBNH, which we mentioned after the CBN takeover and the disclosure of a forbearance. The fact that disclosures in FBNH’s audited account statement showing the relative shares of directors cannot be considered to be a true and fair representation of accurate share-ownership raises severe concerns about;
  • Whether investors can trust other aspects of the account;
  • Whether premium or regard can be placed on the reliability of the records of the registrar and its certifications;
  • Whether FBNH share ownership is hidden behind a thick curtain of undisclosed indirect holdings;
  • Whether other Tier 1 banks have similarly cloudy ownership structures; and
  • Whether minority shareholders should be concerned?
• Deriving from above, could the SEC and the NGX have dropped the oversight ball in ensuring that the true nature of shareholders structures of Tier 1 banks listed on the NGX reflect the accurate and fair state of ownerships; and that the regulators have done their best to protect minority interests by ensuring that share ownership disclosure are transparent, accessible and reliable?
• Has the Pension Commission (PencCom) fulfilled its regulatory oversight responsibility by allowing an individual investor to arrogate worker’s pension fund assets invested in being considered part of attributable personal equity?
• Will SEC and the management of the NGX now require all banks and financial Holdcos to update their schedule of share ownership and insist that individuals and institutions with shares from 5% and above declare such interests (direct and indirect) to forestall such episodes?
• Will the SEC and NGX investigate when the existing directors of FBNH acquired their 5% equity interests and whether they were in breach of disclosure rules as of December 31^st, 2020?

These issues will have to be addressed in the interest of the market and governance requirements to reduce corporate information asymmetry to the barest minimum. The market cannot afford to allow large individual investors to go rogue by reporting what they will and when. Proper and accurate reporting is at the heart of market transparency and provides a significant plank for establishing market credibility.

Legal Lessons

It must be said that the laws guiding announcement of the 5% threshold for significant investors in financial institutions is fairly clear despite the arm wrestling amongst FBNH’s quarellous lead shareholders.

 Section 4.1 of the Central Bank of Nigeria (CBN) financial Holding company (Holdco) guidelines provides that:

Prior approval of the CBN shall be obtained for any shareholding of 5.0 per cent and above or any change in ownership which results in change in control of a financial holding company. Provided that where such shares are acquired through the secondary market, the financial holding company shall apply for approval from the CBN within seven (7) days of the acquisition.

Similarly, Sec 3.2.1 of the CBN Code of Corporate Governance provides as follows: An equity holding of 5% and above by any investor shall be subject to CBN’s prior approval. Where such shares are acquired through the capital market, the bank shall apply for a no objection letter from the CBN immediately after the acquisition.

Rule 12.1 of the amendment to the Listing Rules provides as follows:

 “Every Issuer shall notify The Exchange immediately on any transaction that brings the beneficial ownership in the company’s shares to 5% or more not later than ten (10) business days after such transaction.”

Rule 12.2 of the rules also provides that:

“In the event of any breach of the provision of this paragraph, the Issuer shall be liable to pay a fine of 50% of its annual listing fee“.

Also, in compliance with Rule 13 of the Listing Rules, “this information will be included in the Annual Report“.

The primary capital market regulatory body, the Securities and Exchange Commission (SEC) Nigeria, equally has a few rules concerning significant shareholder acquisitions. The chief market regulator in Rule 397(2) of the Consolidated Rule and Regulations of the Securities and Exchange Commission (SEC) requires the Registrar to file information on any transaction that brings beneficial ownership of shares in the company to 5 percent or more which is to be notified to the Commission, the Company and the Securities Exchange.

Furthermore, Section 1(b) of the SEC Rules defined a Beneficial Owner as:

“any person who directly or indirectly creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the requirement to notify the Commission of any direct or indirect ownership of more than 5% of any class of securities“.

This section alludes to the 5% notification requirement, which is what obtains in practice. Also, quarterly disclosure in the required format is usually filed at SEC.

The crossing of the 5% equity interest report does not stop here; the rules also require the notification of the Corporate Affairs Commission (CAC).

Sec 119. (1) of the Companies and Allied Matters Act (CAMA) 2020, provides that:

“Notwithstanding the provisions of section 120, every person with significant control over a company shall, within seven days of becoming such a person, indicate to the company in writing the particulars of such control.”

Sec 119. (2) of the Act says that:

“A company after receiving or coming into possession of the information required under subsection (1), shall, not later than one month from the receipt of the information or any change therein, notify the Commission of that information provided that a company shall in every annual return, disclose the information required under subsection (1) in respect of the year for which the return is made.

The rules of the different regulatory bodies set the guidelines of disclosure by significant shareholder interests in a company. The rules bring forward the question: how and when did FBNH’s old directors cross the 5% shareholding mark? As recently as December 31^st, 2020, the Holdco stated in its audited annual accounts that no shareholder had a 5% stake in the institution. Given unfolding events, somebody or persons have been disingenuous.

A school of thought notes that since individual direct holdings of the Holdco’s shares were less than 5%, there was no need for regulatory disclosure by the directors.  

The former argument is debatable. The CAMA speaks of ‘control’ and not ‘direct’ shareholding, meaning aggregated company interest was the primary consideration. The SEC rules also underline the importance of disclosing both direct and indirect stakes of an investor in a company as counting towards a significant or controlling interest. In other words, all FBNH directors must come clean and declare their total shareholdings in FBNH and report the same to the different regulators. If they could hide behind a finger in the past, this should not be allowed to continue because it flies in the face of market transparency and full disclosure.

Market analysts observe that information is the lifeblood of the market decision-making process and that the accuracy, speed, and integrity of that information provides the context for price determination. Supplying the market with wrong information suggests market manipulation or, at the least, market misdirection. 

The importance of information explains why FBNH’s initial response to the news of a new significant shareholder was untidy.

Dodgy Information Management

For example, when indications emerged of a spike in traded volume of the Holdco over two weeks of aggressive trading, it was evident that a significant move was afoot and a considerable investor was taking a position. Therefore, it is difficult to understand how the Holdco’s communication could claim that it was unaware of anybody buying truckloads of its shares.

A better media position would have been that it was aware of the heavy trade in its shares. Still, it was yet to receive information from its registrars or the interested party involved in the large purchase of its shares. It would inform the NGX and the general public when the information became available. The first paragraph of the published letter was forgettable (see FBNH letter in the illustration below). 

The Holdco subsequently confirmed Femi Otedola’s purchase of slightly over 5% shares and also went on to release a letter indicating an over 5% holdings of Tunde Hassan-Odukale to the CAC (after the media frenzy); without a report to the market as it should  

NB: Minority investors may need to note that these relative shareholdings are moving targets as information available to Proshare indicates that different parties have since added more shares to their portfolios, with cash flooding the acquisition playground.

The Sub-plot

Some major investors have past due loans with the bank and may need to sell-off shares to write down their loan repayment defaults. This would have to be factored into the ongoing ‘game of thrones’ at the Holdco while determining the relative strength of the high net worth investors in the behemoth.

On the face of it, the writing down of delinquent loans should improve FBN’s non-performing loans book (NPLs), raise liquidity and put a shine on the bank’s capital adequacy ratio (CAR). Smaller investors would, therefore, take solace in the fact that improved bank fundamentals would see a series of share price rises as Q4 2021 results of the bank show more substantial operating numbers.

The battle for FBNH soul is not just about contesting egos, but equally and more importantly, about hidden value. The Holdco has intrinsic value that could be realized with clear Ownership emerging from a single entity or a combination of significant shareholders, pushing the business towards improved operational performance. The new share ownership Structure could lead to lower volumes of delinquent insider loans and better resource management, translating into lower cost-to-income ratios (CIRs).

If this scenario plays out, then the drama of the last few weeks would have been well worth the uproar.

Conclusion- The Phoenix Reawakens

Femi Otedola is not the easiest of individuals to understand or ignore. He has proven this over the years, and his business moves, while unconventional and sometimes erratic, are always intentional. He takes decisions that often prove inspired, especially those that affect his net worth and the texture and direction of industries he chooses to invest his cash. It would be a grievous error to bet against Otedola’s recent FBNH foray. The one-time oil maven has proven, over the years, that he has a yen for timing and a trained nose for the big moments.

Admittedly, Otedola has made errors in the past, which has proved to be costly, yet like a phoenix, he somehow finds his way back to succeed in what cards he is served in a game of business poker. Indeed, with his recent FBNH equity acquisition, the financial services sector may see a redirected strategic shift of the Holdco as the wily investor takes on freshly minted blue ocean opportunities to protect his investment. For some reason, American investor Carl Icahn comes readily to mind; if only because Otedola’s recent manoeuvres look like a leaf from Icahn’s 1990s playbook. However, analysts cannot discount that this might be a new card shuffle for a now legacy-minded entrepreneur seeking a dance with immortality.

In his famous book ‘The Prince,’ political strategist Niccolo Machiavelli, noted “Men nearly always follow the tracks made by others and proceed in their self affairs by imitation, even though they cannot entirely keep on the tracks of others or emulate the prowess of their models. So the prudent man must always follow in the footsteps of great men and imitate those that have been outstanding“. Perhaps Otedola has heard the call and has equally decided to heed the message.

The next few weeks should prove interesting. There will be more twists and turns ahead on this journey as a huge chunk of the FBNH’s shares understood to be available for sale may tip the scales towards one investor or the other. However, the ultimate chessplay should be to the advantage of the Holdco’s minority shareholders. The battle of the titans should provide grist for the lender’s profit mill.  

ADAPTED FROM PROSHARE NIGERIA