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Questions raised over whether book building method is the best for sale of State assets.

Capital market players are sharply divided after it emerged that a Safaricom foreign lead transaction advisor had hogged shares with a market value of Sh5.8 billion.

In fact, the Morgan Stanley Pic windfall has revived debate over whether the book building method of share sale should be employed in the highly charged privatisation issues in Kenya.
This is all the more so after the agent only achieved a 50-cent premium above the domestic pool pricing of Sh5.

Amongst those left scratching their heads is Mr Vishal Agarwal, the PricewaterhouseCoopers lead transaction adviser in the Kenya Electricity Generating Company (KenGen) IPO whose book-building process was shredded by agitated stockbrokers in fear of being locked out from the commission high table.

This time round, Morgan Staley has firmly kept broker fingers out of an entire 820 million shares. And they are inexplicably quiet even after the Capital Markets Authority barred them from buying on their own account.

Morgan Stanley, together with their local partners Dyer & Blair, were engaged by Treasury to advise on the transaction for 50 cents.

With the kind of experts and the staff they often had to bring in and out of Nairobi, it would take an act of magic for them to cover their cost from the 50 cents, which would essentially leave each partner with 25 cents. Independent consultants would hardly be in a mood to be so charitable.

Holding for clients
Having reportedly said last week that they were holding the shares for their clients, it seems the move to offer almost free services is about to pay off. They will charge the clients on whose behalf they are warehousing the 820 million shares and probably the others on their book.

"Book building is a big black box' said independent analyst, Mr Robert Bunyi, who added that a fixed price could have sufficed in privatisation issues like Safaricom. He says that book building's inherent lack of transparency accelerated the dot.com bust in the US.

Ironically, the controversy could have come years earlier when a local consortium of investment bankers sought the same for the trend-setting KenGen initial public offering in 2006. The consortium consisting of Dyer & Blair, CFC Financial Services and Standard Investment Bank (DCS) failed in its bid as brokers rose against the concept.

"We are grateful it did not happen," said one of the players last week in view of the suspicion around the Safari-corn book building. On Thursday when we caught up with him, he had received five calls seeking opinion on the report about Morgan Stanley's having obtained about 820 million shares first carried in these pages last week.

Mr Agarwal went out of his way to sell the book building process and explained how the pricing and the bidding would proceed. He was drowned out by the collective voices of the brokers.

He now wonders what has changed since to inform Treasury's decision to allow Morgan Stanley a free hand in running the book. In the PWC case, he said, they had no intention of underwriting the issue and had offered full transparency.

Sorely lacking in the Kenyan market regulations are rules governing book building, a price discovery mechanism for arriving at the optimal price through inviting bids from fund managers.
But Mr Agarwal dismissed the notion that rules - which Nairobi Stock Exchange and Capital Markets Authority went out of their way to seek views about then - need to be formulated.
Strict rules.

"What we need is just a straightforward methodology on how you are going about it," he told Sunday Nation.

Book building is commonly used in other markets like Nigeria, the United States and India.

Indeed, the latter has strict rules. At the Bombay Stock Exchange where the book remains open for five days - and the process is accessible by both institutions and retail investors - book building is governed under Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000. The book building is available on screens of 7,000 traders spread over 350 cities in the country.

"I am not saying Morgan Stanley did anything wrong, but you have to ask why book building was acceptable now and not then," Mr Agarwal said.

Some market players, however, supported the non-disclosure of clients, saying it was standard amongst investment bakers.

Custodial services
Renaissance Capital CEO Maina Mwangi said it was the practice the world over and that the firm is just carrying out custodial services like any bank would. He says book building still has a place in the privatisation process.

On the Sh5.50 pricing of the foreign pool, he said this was influenced by the Sh5 set for the domestic pool besides the information available to the more discerning institutions that applied for the foreign pool.

The foreign pool raked in Sh11 billion, only Sh1 billion above what the shares would have fetched if sold locally.

Mr Bunyi takes a different position: "The premium was negligible. This book building is not superior to fixed price." He urged the Treasury and CMA to create an orderly and transparent system.

But it is obvious that given local market dynamics, Kenyans would have snapped up the shares even at a price higher than Sh5.50 - leaving a huge question mark over whether Treasury got equal value to the 50 cents it paid the advisors. Privatisation issues in Kenya are meant to finance state operations in addition to spreading ownership. In terms of the latter, it succeeded in leaving a bitter taste for those who got only the 21 per cent allocation, and especially for those who borrowed for the purpose.

As foreign investors remain net sellers at the NSE, one may also ask whether there is much value to be gained from selling corporations abroad. Instead of providing the stabilising factors, by selling they are just amplifying the volatility conventionally emanating from retail investors.