Multinational companies unable to repatriate dollar dividends and stuck with naira they don’t immediately need are using the idle cash to buy tiny bits of ownership in their local units.
Heineken B.V, Nestle SA and Unilever Overseas holdings have since August bought additional shares in their local units, with more companies with foreign owners expected to do the same amid the dollar crunch in Nigeria.
By channelling idle cash into the shares of their Nigerian entities, the multinationals achieve two things.
One is they are able to hedge against inflation in Nigeria, which accelerated to a two-year high of 12.8 percent. What this means is that the naira risks being eroded by higher inflation.
The second thing the multinationals achieve is the opportunity to buy shares of their local units, some of which are at record-lows, cheaply.
The small quantities being bought by these multinationals however suggest that they are probably finding use for stranded naira in Nigeria that should have be converted into dollars and repatriated as dividend proceeds rather than bargain hunting in their local units.
Investment bankers, however, say the trend is alerting some retail and institutional investors to the opportunities in the cheaply valued stocks of some of the local multinational companies.
Heineken B.V, the majority shareholder in Nigerian Breweries, has bought shares of the beer company four times since August, with the latest transaction on August 25 when it acquired 53,272 units at an average price of N36 per share. That’s the lowest price since 2017.
In total, Heineken B.V acquired 7.2 million shares in Nigerian Breweries over the course of the month, according to data compiled by Business Day and sourced from the NSE.
For context, that’s not even up to 1 percent of Nigerian Breweries’ outstanding shares of 8 billion.
Nestle SA and Unilever Overseas holdings are also buying trickles of their local units at cheap amounts.
Nestle SA, which bought 636,384 units of shares in Nestle Nigeria on August 20, before buying an additional 111,663, August 26, bought them at an average of N1,175 per share, that’s down from a peak of N1,600 this year. The total 748,047 shares bought by Nestle SA equate to only 0.09 percent of the Nigerian unit’s 792 million outstanding shares.
Unilever also bought 17 million units of shares in Unilever Nigeria on August 10, before adding another 67 million shares on the 27th.
Both deals were done at an average of N12 per share, that’s down 48 percent from the price in January. The total 84 million shares amount to 1.5 percent of Unilever Nigeria’s 5.75 billion shares.
“These amounts are too little to suggest it is more than these companies finding a way to deploy stranded naira,” one investment banker told BusinessDay.
“For the multinationals, it makes sense to reinvest dividends in their local units rather than hold naira waiting endlessly for dollars to come from the banks.”
It has become increasingly difficult for Nigerian firms to source dollars amid a supply shortage caused by lower oil prices and reduced foreign portfolio inflows into the country on the back of the COVID-19 pandemic.
Data released Friday by the National Bureau of Statistics (NBS) showed that capital importation into Nigeria slumped to a four-year low of $1.29 billion in the second quarter of the year.
The CBN’s capital controls has made what was already a bad situation in Nigeria worse, with foreign investors whose funds are trapped in the country sending a damaging signal to other investors.
Several multinational companies face the challenge of sourcing dollars to aid repatriation of dividends. But the pain is also felt by manufacturers who can’t get more than 15 percent of dollars they need for key inputs at the official market.
Banks won’t honor card payments and Nigerian students abroad are stranded as economic output hurtles toward a second contraction in four years. The NBS reported last week that GDP contracted 6.1 percent, the most since 2004. One more quarter of negative growth and the economy is in recession even though it hasn’t fully recovered from the last one in 2016.
Dependent on oil exports for half of its revenue, the Nigerian government’s coffers have emptied after crude prices plunged in the wake of the coronavirus pandemic.
There’s little prospect of a respite any time soon: it needs oil prices of $70 per barrel and production of 2 million barrels a day to balance its budget, but prices are hovering around $40 and OPEC curbs have restricted the nation’s output to about 1.4 million barrels a day.
The decline in dollar inflows has boxed the CBN into a tight corner. It has devalued the naira three times already this year, that’s more times than in the last three years. Yet there may be even more devaluation coming with the CBN targeting a unification of its multiple exchange rates.
A World Bank loan of $1.5 billion which was partly supposed to help the CBN meet a growing dollar demand backlog of between $5-7 billion has been suspended due to the apex bank’s slow pace of reforming its foreign exchange market.
As the dollar crunch wades on, it’s the economy that is paying the ultimate price just like it did in 2016.
