Wema Bank’s decision to off load its 75 percent majority stake in Great Nigeria Insurance (GNI) Plc, to Resourcery and Consultancy Services Limited, has financial implications for both shareholders and investors.
The divestment is valued at N3.24 billion, while a total of 2.87 billion 50k ordinary shares of GNI were transferred to Insurance Resourcery and Consultancy Services at N1.13, which represents a premium of 126 percent.
This is an inflow in form of cash inflow for Wema as the lender can take the money realized from the deal to the reserves there by resulting in a 6.78 percent increase in total equity to N50.36 billion, from N47.16 billion as at June 2016.
On the other hand, if the lender decides to pay all of the N3.24 billion inflow as onetime dividend to shareholders, that will translate to a dividend per share (DPS) of N0.08k for every one naira held.
The proceeds from the deal will help bolster the lender’s capital adequacy ratio, which currently stands as about 15 percent, higher than the regulatory threshold of 10 percent.
Some shareholders or owners would rather prefer the N3.24 billion is plunged back into the business for future expansion or to finance capital projects such as funding the acquisition of new technologies to save costs and improve on efficiency.
Aside the fact that parent companies spin off or divest because of lack of alignment with core business, or lack of cohesion with the fundamental company strategy, protracted dwindling profitability is one of the most fundamentally sound reasons for a divestiture.
It is logical for Wema to off load the burden of GNI from its balance sheet as the Nigerian insurer has been hard hit at the bottom line since 2014. Its share price has been stuck at N0.50 since November 2014.
In these times of recession and with the banking sector struggling with prolonged fall in oil price, liquidity squeeze due to foreign exchange scarcity and rising NPLs as a result of exposure to the oil and gas, an asset sell off is a viable option.
In conclusion, the divestment from its subsidiary segment is positive for Wema as the lender’s capital needs will be met while boosting shareholder’s returns.