Delisting Nestle Lanka PLC

Except for perhaps some 6,000 plus Nestle Lanka minority shareholders and stock market participants including retailers, many of them pensioners with time on their hands and not much capital resources to play the market, would have been interested in the recent announcement by Nestle Lanka PLC which has been quoted on the local bourse for 40 years that they plan to delist. But the question arises whether such a decision by a multinational company which has had a global presence for over 150 years and is one of the world’s biggest food brands, is fair to the minority shareholders of their Sri Lanka incorporated company. Nestle boasts it has been present in this country for over a century and the brand is a household name not only here but in many parts of the world. That was a factor that attracted investors to buy its shares when it was first listed on the Colombo bourse. But now, four decades later, they plan to delist.

It must be said in fairness to the company that it has announced that it will be paying a dividend of Rs. 75 a share to its shareholders, probably the biggest ever declared on the Colombo Stock Exchange, prior to its delisting. Analysts and market observers believe that this is a way of paying out all the cash in the company to its present shareholders before it becomes an unquoted subsidiary of its Swiss parent, Nestle SA. Alongside its directors’ delisting proposal, the company has announced its intention to pay Rs. 1,500 per share to the minority which the company says is an “attractive and fair premium.”

But, as a correspondent to a financial daily wrote a few days ago, the mere announcement that the company, subject to regulatory and shareholder approval, will delist is not the end of the story. The directors recommendation can still be rejected by the shareholders, he has noted. This happened twice in recent times. First, the quoted Bank of Ceylon subsidiary, Property Development PLC (previously PDL) that owns the banks headquarters building, and AIA, the insurance multinational were rejected by minority shareholders on a ‘one man one vote principle’ against ‘one share one vote’ which generally happens where members are polled at company meetings. In AIA’s case, a price of Rs. 2,500 a share against an original exit offer of Rs. 1,000 was eventually paid.

The delisting of PDL was in limbo for as long as five years after the proposal was first announced. In the case of that company, it ultimately delisted by paying Rs. 183 per share, up 40% from Rs. 130 offered in 2018. The PDL share, of course, did not enjoy the capital appreciation that the Nestle share did, nor did it pay very high dividends like the latter. Finally PDL itself, and not the Bank of Ceylon – its predominant shareholder – bought out the minority.

Although Nestle was unable to pay dividends to its shareholders in the early years as a listed company, investors who were patient were delighted to see in later years capital appreciation of their shares and dividends that were among the highest declared by companies listed on the CSE. The company also did not make a great success of its spray drying milk powder project, something much needed by the country which has long been unable to make a dent in the import demand for this product. Nestomalt, Maggi, coconut milk powder etc. are Nestle products that have made their mark. Coconut milk powder has done very well in export markets. The company’s contribution to local dairy development is also not inconsiderable and its presence in the country has undoubtedly been for Sri Lanka’s benefit. It says it will maintain its presence here and development focus. But all things considered, remaining listed in Colombo and permitting nationals to have an ownership stake, though small, in the company would be considered desirable by many.

Around 2021, Nestle Lanka’s parent began to buy shares available on the market, a big block of slightly under 300,000 shares done at Rs. 1,200 a share. Some market participants, sensing or speculating of a delisting down the road began to focus on the share but acquiring quantity was difficult due to unavailability and the price per share being also high. So trading opportunities were limited.

Nestle has now announced that an Extraordinary General Meeting will be held in Colombo to consider the delisting resolution. It needs no rocket science to forecast that the company with over 6,000 minority shareholders, over 5,000 of them holding between one to one thousand shares, it will be possible to outvote the resolution on the ‘one shareholder, one vote’ principle. Given the experience of PDL and AIA, it is most likely that an effort will be made to force up the exit offer price. Other than for Nestle SA, the parent, no shareholder on the register holds more than one percent of the company. But institutions like the Sri Lanka Insurance Corporation, EPF and foreign and local funds are among the minority. Whether they would be satisfied with the exit offer or join the majority to up the ante remains to be seen.