Here comes the Coop IPO

October 27, 2008

, NAIROBI, October 27 – Cooperative Bank’s announcement last week of a Sh9.50 Initial Public Offer (IPO) price offer to raise Sh6.5 billion instead of the previous target of Sh10 billion triggers a few questions, the most pertinent one being the bank’s strategy.

Its original requirement was Sh10 billion to sustain the bank’s strong growth rate. Now that it is willing to accept Sh3.5 billion less, is it also willing to accept a slower growth rate? One would assume that the bank has had to cut back its investment plans and fit its aspirations into a tighter budget.

Existing shareholders may also question the management about this new offer price. Why should they sell additional shares to outsiders at such a large discount? Admittedly the equity market is in a terrible slump and it would be almost impossible to successfully complete an IPO at the valuation benchmarks we were used to only three months ago.

So why not wait? Doesn’t this send a signal to the market that the bank is desperate for cash?

An alternative option would have been to approach the Capital Markets Authority for an approval to issue a bond and raise about Sh3 billion to finance the IT project plus kick start some of the long dated lending products. At a later date an IPO would then be considered once stock market conditions improve sufficiently.

The management could also opt for a combination of a private placement and public offer. In this case the private placement would have been done with local institutions and if indicative demand is encouraging proceed with the public offer. Yet another option would have been to seek a strategic investor, as Equity Bank did recently, who would take all the stock now with a commitment to selling down on the bourse at a later date. I’m no investment banking expert but it just seems to me this was the moment to innovate rather than wheel out the same old public offer.

On the positive side, Co-op Bank is a household name and you should not underestimate the strength of the brand. I’ll not be surprised if it is fully sold. Let us also not forget that the funds raised will be invested into the business and if my cursory observations above are right, the public is probably being offered a bargain. I’ve not done any number work here but as I’ve mentioned previously this IPO is looking like a sweet deal. I suppose you’d counter that every other share in the market looks sweet presently?

In laying out these observations I’ve not commented about valuation, but since no one seems to care about fundamentals anymore that can’t be a bad thing. However, at all times you should base all your investment decisions on a sound valuation. A decision to buy this IPO should be based only after reviewing the prospectus which should be available at the end of next week. Funny thing is that this time round I can’t seem to find even a leaked copy on the internet. Clearly we are living in strange times.

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