Wema Bank share reconstruction to give room for new rights issue

Wema Bank Plc, one of the oldest Nigerian lenders, which operates with a National Bank license, is set to raise up to N40 Billion equity by way of Rights Issue, as the Board of Directors expects shareholders to give approval to the plan at the upcoming Extra-Ordinary General Meeting scheduled to hold at 12:00noon on Friday, 31 December 2021.

If the plan of the Board is approved by shareholders, each shareholder of “Agbonmagbe” Bank, as it was originally called, would be entitled to two new Rights shares for every three units being held at the time, implying that the N40billion Rights Issue would represent some 40% of the new share  capital of the Bank, thus putting the current valuation of the Bank at N60Billion.

 The plan to raise equity capital was to fulfil the dire need of the Bank to shore up its capital level, as capital adequacy ratio stood at barely 12% at the end of the third quarter of the year, just some 200basis points above the 10% minimum capital requirement and suggesting that Wema Bank’s balance sheet growth may be stunted without additional capital injection.

Notably, the bank’s internal capital generation level is still relatively weak, due to its modest profitability – some N6.2billion in the first nine-months of the 2021.  

As a way to give room for the new Rights Issue, Wema Bank would be holding a Court-ordered meeting at 10:00am on Friday, 31 December 2021, barely two hours before the Extraordinary general meeting where the Rights Issue would be considered by shareholders.

At the Court-ordered meeting, shareholders would be expected to approve the proposal of the Board of Directors to reconstruct the existing shares of Wema Bank Plc by reducing the 38.574 billion ordinary shares of 50kobo each (or N19.287 billion share capital) by 67% to 12.858 billion ordinary shares of N50kpbo each or N6.429billion.

This right-sizing of the share capital is to give room for the issuance of additional 8.572billion units of ordinary shares through the Rights Issue. Notably, once the share reconstruction is approved, the unit holding of existing shareholders of Wema Bank Plc would reduce by 67%, implying that shareholders would only have one unit for every three units of shares currently being held.

Alhough the number of shares being held would be reduced, the shareholding of every equity holder in the bank would remain the same.

For example, a shareholder like Odua Investment Company, the investment arm of the South West states, which currently holds 3.191 billion shares would still maintain its 8.27% shareholding but would have its units of shares being held reduced to 1.063 billion ordinary shares. However, any shareholder which refused to take on its Right Issue would have its shareholding diluted after the Right Issue.

Once the share reconstruction is done, the price of Wema Bank shares, which closed at N0.77 per share on the floor of the Nigerian Exchange Limited (NGX) on Friday, 24 December 2021 would be marked up to N2.31 per share, as three units of current ordinary shares would now be consolidated into one unit after the share reconstruction.

While the price of the Rights Issue is yet to be fixed, analysts are concerned that the Rights Issue price may be at a premium to the reconstructed share price, indicating that the existing shareholders, especially minority investors may not take up the Rights and the Bank may have identified existing major shareholders or new investors willing to take up minority shareholders’ Rights as a way of taking influential stake in the Bank.

Incidentally, analysts are concerned that the share reconstruction may destroy value for existing shareholders, as the new price of the shares may plummet towards current price, thus eroding the value of existing shareholders’ investment. This concern is supported by evidence of companies that have done share reconstruction in the past, including recent events of Axa Mansard Plc and NEM Insurance Plc, which recently reconstructed their shares.

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