Analysis of Director Dealings disclosures from the Nigerian Exchange Limited has shown that Nestle S.A. bought an additional 7.44 million shares worth N10.41bn of Nestle Nigeria between May 7 and August 19, 2021.
Nestle S.A is the parent company of Nestle Nigeria and according to its audited financial statement for the year 2020, the Switzerland based firm owned a total of 527,080,970 shares representing 66.50 per cent of the ordinary shares of the Nigerian subsidiary. Nestle S.A began a round of share buybacks on May 7 with the acquisition of 29,770 shares at a price of N1400.00 per share.
As of Thursday August 19, 2021, the Swiss based Nestle S.A. had bought 7,444,379 shares worth N10,414,392,000, raising Nestle S.A’s control of the company to 67.43 per cent.
The Notes to the Annual Report 2020 of Nestle Nigeria showed that the company took two tranches of US$100m bailouts from its parent firm at 11.34 per cent interest. It stated, “A loan of US$100m was approved for the Company by Nestle S.A in April 2020 of which US$72.5m was drawn down as at 31 December 2020. The loan has a tenor of seven years (inclusive of moratorium period of two years on interest payment only) commencing from April 2020.
“The facility which is unsecured attracts interest at three months USD Libor plus a margin of 1134 basis points. There is no fixed payment period agreed agreed in the loan contract. Payment is to be made subject to availability of Fx.
“An additional US$100m was approved for the Company by Nestle S.A in September 2020 of which $7.0m was drawn down as at 31 December, 2020. The facility which is unsecured attracts interest at three months USD Libor plus a margin of 747 basis points. There is no fixed payment period agreed agreed in the loan contract. Payment is to be made subject to availability of Fx.”
The same report also revealed that as of December 2020, Nestle Nigeria’s net finance costs jumped by 302.90 per cent from N938.22m in 2019 to N3.79bn in 2020. Also the company’s recently released unaudited financial statements for June 2021 showed that the net finance costs increased by 328.14 per cent from June 2020 to June 2021.
The company’s chairman, Mr David Ifezulike said in its annual report that the year 2020 was a challenging one for the company’s business due to impacts of the COVID-19 pandemic on the Nigerian economy. He said the company’s input costs increased drastically as the country was hit hard by inflation and there was a significant reduction in disposable income of consumers as a result of higher electricity tariff and the cost of Premium Motor Spirit.
Uwa Osadiaye, a Senior Vice President at FBN Quest while responding to a question about why Nestle S.A. was buying back shares amid the $200m loan, he said that companies only buy back shares when they feel the company they own is very cheap. “I have to expect that Nestle S. A’s management believes that Nestle Nigeria’s ability to repay the loan is good enough. They might be of the view that Nestle Nigeria’s shares are trading at a discount.”
The Managing Director of an investment management firm speaking under anonymity however was of the view that the Nigerian subsidiary was heavily leveraged financially. He said, “The parent company is undoubtedly at risk of losing income so has decided to cut losses. Looking at the loan terms, it was structured as a convertible loan with the unavailability of Fx clause.
“Fx constraints will make it difficult for Nestle Nigeria to make repayments hence the share option. It’s a cheaper source of financing using the equity option rather than sourcing debt domestically. It takes the cash burden off Nestle Nigeria and allows them to do more trading.”