What will you do with your Safaricom IPO refund?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

18 May 2008

Preliminary results show that the Safaricom Initial Public Offer (IPO) was oversubscribed: Local investors applied for over 380 percent of the number of shares reserved for them. In other words, the locals paid in over Sh120 billion instead of the expected Sh 32.5 billion.

I wonder what will happen when the excess Sh 90 billion is released back into circulation on a single day early next month. That is for the Central Bank to figure out but I know what I will do with my refund.

Yes. I also put in my Sh 10,000 in the IPO for 2,000 shares. Even though the allocation criteria will be made public at the end of this month, I can estimate how many shares I will be allocated. The IPO prospectus stated that investors will first get 100 shares and then the balance will be distributed on a “pro-rata” basis but rounded down to the nearest 100.

A subscription rate of 380 percent means that local investors applied for 3.8 times the number of shares available. Therefore, to find out how many shares I will get, I simply divide 2,000 by 3.8 and round down the result to the nearest 100.

The result is 526.3, which rounds down to 500 shares. At five shillings each, these will cost me Sh 2,500 thus I will get a refund of Sh 7,500. Before “blowing” this money, I will wait to see happens when the shares start trading at the Nairobi Stock Exchange.

The optimistic prediction is that the price will go up to Sh 7.50 per share. If that happens, I will only sell enough to recover my Sh 2,500 investment. That is 334 shares, which will fetch Sh 2,505. When this is added to the refund of Sh 7,500, it is clear that all my Sh 10,000 will be recovered…and I will still have 166 shares to my name (for which I will have paid absolutely nothing!)

The pessimists, however, contend that there will be too many sellers (most of over 750,000 applicants took loans to finance their applications) and this will cause the price to drop to about Sh 3.00. I will not panic if that happens.

I will use the refunded Sh 7,500 to get more shares thereby reducing my average purchase price. At Sh 3.00, I will get additional 2,500 shares bringing my total shareholding to 3,000.

Now these 3,000 shares will have cost me Sh 10,000 (Sh 2,500 in the IPO plus Sh 7,500 in the open market). That works out to an average price of Sh3.33. Therefore, when (not if!) the price goes back to Sh5 (or higher), I will sell 2,000 shares to recover my initial Sh 10,000.

Selling 2,000 shares will still leave 1,000 in my CDS account. Again, shares for which will effectively cost me nothing!

Now, that’s my plan. What will you do with your refund?