Share buyback refers to the actions taken by a listed company or any other entity to repurchase its own shares, either through off-market or on-market (exchange) purchases or contingent contracts. This strategy provides an avenue for utilizing surpluses, apart from methods like dividends, bonus shares, business reinvestment, expansion, and research and development.
Unlike markets such as the United States and most European exchanges, the Nairobi Securities Exchange had not fully embraced these possibilities. Historically, there have been only three share buyback programs in Kenya’s capital market, involving two companies. One notable program was Nation Media Group’s initial 10% share repurchase, which achieved an 82.25% success rate. Currently, Nation Media Group is undergoing a second share buyback aiming to repurchase 19.03 million ordinary shares. Another participant, Centum, has an 18-month program until August 2, 2024, aiming to buy back 10% of its issued share capital.
Companies considering share buybacks must adhere to the provisions of Division three of the Companies Act, No. 17 of 2015, and CMA Guidance on Share Buybacks by Listed Companies. Factors to consider include:
1. Reviewing the Articles of Association for prohibitive clauses.
2. Considering pre-emptive rights clauses in share purchase contracts.
3. Evaluating charges and conditions that may restrict buybacks.
4. Assessing the need for liquidity post buyback in the short term (2-3 years).
Shares, once repurchased, are classified as either Treasury Shares or Cancelled. The company can finance a share buyback using distributable profits or proceeds from a fresh issue of shares.
Benefits of a share buyback may include wealth distribution, premium on shares, dilution of excess cash, increased equity capital without issuing additional shares, and a deterrent to hostile takeovers. Disadvantages include poor use of cash, myopic strategy, high share prices for cash-rich companies, unsustainability, and taxation on gains.
A takeover involves the acquisition of a company’s controlling interest by individuals with no material ownership. The structure varies based on the target’s willingness and the terms proposed by the offeror. Unlike share buybacks, takeovers have been more prevalent in Kenya and the region. Takeovers can be friendly or hostile, with diverse shapes like creeping, bailout takeover, and reverse takeover.
Defenses against takeovers include share repurchase programs, poison pills, greenmail, standstill agreements, leveraged recapitalization, leveraged buyouts, crown jewel defense, and scorched-earth policy.
Looking Ahead to 2024
The Kenyan market has faced challenges like capital flight and a pandemic in recent years. As we enter 2024, the economy hopes for favorable conditions, but uncertainties persist. The U.S. Federal Reserve’s intention to implement interest cuts may face challenges amid geopolitical competition and consequential elections. The beer market, including the NSE, may remain in non-major stock markets, necessitating the need for preservation against takeover threats. Scribe Registrar, a certified secretary and NOMAD, is ready to guide companies in navigating these dynamics.