TRANSCORP IPO: CAVEAT EMPTOR

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000170 SIPDIS SIPDIS DEPT PLEASE PASS TO FCC; DEPT PLEASE PASS TO NED CABOT AT USTDA E.O. 12958: DECL: 02/20/2017 TAGS: ECPS ECON EINV EIND PGOV PREL NI KCOR ENRG SUBJECT: TRANSCORP IPO: CAVEAT EMPTOR LAGOS 00000170 001.2 OF 002 ¶1. (C) Summary: Transnational Corporation's (Transcorp), recent initial public offering (IPO) exemplifies how finance and electoral politics merge to create an ambivalent situation for investors. The 60 billion naira ($462 million) IPO has been greeted with mixed reactions. Transcorp is the brainchild of President Obasanjo. Many observers charge he encouraged its creation to form a new national economic elite beholden to him. However, the closeness of Transcorp to President Obasanjo's administration now makes investors wary of its fate considering the constitution requires Obasanjo to exit the Presidency on May 29. Most of Transcorp's initial investors, many of whom contributed heavily to Obasanjo's 2003 presidential campaign, are distancing themselves from the company due to adverse public perception that Transcorp received preferential treatment. The controversy surrounding Transcorp demonstrates the heavy extent to which politics and political affiliation influence the private sector. End summary. -------------- Primer -------------- ¶2. (SBU) Transcorp began operations in May 2005 and, from the start, the company was handled with kid gloves. Most of the founders of Transcorp were members of "Corporate Nigeria", a group of private-sector players who contributed heavily to Obasanjo's 2003 presidential campaign. Industry watchers attributed this preferential treatment to Presidential backing and that NSE director general, Ndi Okereke-Onyuike, doubles as Transcorp Chairman. Okereke-Onyuike has been publicly criticized for the inherent conflict of interest of serving two masters. -------------- Nigerian Stock Market: Enter Transcorp -------------- ¶3. (SBU) In November 2006 Transcorp was first listed on the Nigerian Stock Exchange (NSE),and added 111 billion naira (approximately $850 million) to the market capitalization of the NSE. This followed a private placement in which 19 billion naira ($146 million) was raised, far exceeding the 6 billion naira ($46 million) target set in March 2006. With its IPO in December 2006, Transcorp hoped to raise another 60 billion naira ($462 million). The closing date for the IPO has been extended twice, fuelling suspicion of under-subscription. -------------- Industry Experts Doubtful Of Profits -------------- ¶4. (C) Transcorp's IPO has caused a stir on the NSE since it opened. Many experts saw an exaggerated stock valuation and doubted the company's profitability. According to a financial analyst, Transcorp only has two present lines of business: hospitality and telecommunication, the latter being currently moribund. The company recently bought the Hilton Hotel in Abuja and Nigerian Telecommunication Limited (NITEL). While the Hilton Hotel is a profitable venture, the same cannot be said of NITEL, which was moribund at the time of purchase. Transcorp also holds a crude oil mining lease and a refinery license. This analyst was doubtful that the leap in Transcorp's share price from one naira at inception to six naira at the private placement and 7.50 naira at the IPO was based on economic analysis. Several industry analysts accused many of Transcorp's initial investors (dubbed "the President's businessmen") as having made huge profits from trading in Transcorp shares even though the company has done little business in its two years of existence. (COMMENT: The steep appreciation of the stock was artificial, driven almost solely by the political fact that Transcorp was President Obasanjo's corporation. END COMMENT). -------------- Transcorp Promoters Abandon Ship -------------- LAGOS 00000170 002.2 OF 002 ¶5. (SBU) Due to the public backlash at the rather cozy relationship between Transcorp and the GON, many of the leading figures in Transcorp with close public ties to President Obasanjo have begun to take a back seat. Business magnate Aliko Dangote resigned from Transcorp's board, citing a busy schedule. Subsequently, major bank managing directors (MDs) Tony Elumelu (United Bank of Africa),Jim Ovia (Zenith Bank) and Jacobs Ajekigbe (First Bank) resigned from the board in compliance with the Banks and Other Financial Institutions Act (BOFIA),which forbids bank MDs from being directors of any non-financial organization to avoid a conflict of interest. ¶6. (SBU) Femi Odetola, MD of Zenon Petroluem, Nigeria's foremost diesel marketer, has also distanced himself from Transcorp. Election politics have also crept into Transcorp's boardroom. Original MD Fola Adeola was removed after he publicly made statements opposing a presidential third term and also hinted at running for a senate seat in Ogun State - the same seat President Obasanjo's daughter wanted. -------------- -------------- Political Affiliations May Become Disadvantageous -------------- -------------- ¶7. (SBU) According to an industry source, the change in posture by its initial investors has its roots in the failure of President Obasanjo to achieve a third term. While the group supports the Presidential candidate of the People's Democratic Party, Umaru Yar'Adua, for the 2007 election, an industry source believes that, by exiting from the Transcorp board, the group is hedging against a possible lack of support for the company by the next presidential administration. -------------- Uncertain Future -------------- ¶8. (C) Comment: The uncertainty surrounding the company's future once Obasanjo leaves the Presidency makes the Transcorp IPO an uncertain investment. Though the company's foray into oil exploration and refining may yield returns in the future - assuming the licenses for both are not revoked by a new government - the second wave of investors will have a long wait before earning returns. Although stockbrokers have told us that they expect an oversubscription of the IPO - a sign of a successful IPO in Nigeria - the real test will be how the company fares when its intellectual author has left the Presidency. End comment. BROWNE