Finally Something We Can Both Agree On: Grameenphone's sham IPO

This is probably how the conversation went before the Grameenphone IPO filing:

Yunus: "I think we should help the poor partake in Grameenphone's IPO"

Jensen: "How do you suppose we accomplish that?"

Yunus: "Well I thought pricing this share at Taka 1, would be more than enough as the poor will be allowed to get into the stock market with the money with the money borrowed from Grameen Bank"

Jensen: "I think you have a very excellent idea, may I also suggest a 17 taka premium? That would only mean a 18 taka share price, clearly affordable"

Yunus: "Yes 18 taka is quite reasonable considering some shares hover over 2000 taka"

Jensen: "Yes, a 17 taka premium means a 1700% premium. If the SEC rejects this proposal, we will cut it down to a 900% premium. That only means a 10 taka share. The SEC will put up a small fight, but then we will negotiate it at Taka 10. Still a huge premium"

Yunus: "But won't the SEC still object"

Jensen: "Compared to our initial filing, this new 900% premium will look like a bargain. Also think about it this way, for the rest of eternity we will issue dividends on a face value of 1 taka."


Now readers, if you had any aspirations of being a proud owner of a Grameenphone stock, lets calculate your investment. The SEC has never given a premium over 50% in the last 10 years. Most stocks were limited to a 25% premium. Grameenphone seems to think that they can eyewash everyone with the affordable price but with a 1700% premium. The highest premium ever for Bangladesh, making it the most unaffordable stock at the stock exchange.

Dividends won't add up
How does the economics work out? A 25% dividend is considered a good dividend in the stock market. But with Grameenphone it will be the opposite. Clearly Telenor did not pay 18 taka for a 1 taka stock and this 25% dividend suits them just fine (also they can adjust the machinery invoices easily - i.e. pay Telenor Pakistan for 'new' machinery). But for you, who just spent 18 taka on this stock, what does this mean?

Your returns vs Telenor
It means that you get 25% of the stock's FACE VALUE. The face value is 1 taka. Hence it for your 18 taka investment you are getting a 1.38% return on your investment. This is the price you will be paying when investing in this stock. Telenor is making more than 25% return on their investment (through stock and over invoicing).

But you with the brokerage costs will be lucky to make a 1% return. Now consider the alternatives, letting your investment sit idle in a savings account gets you 7% return, and a FDR gets you almost 15% return. You wanted to be a part of Grameenphone and this is the price you will pay. Telenor is ready to suck the blood out of many 'small investors'.

Further Irregularities: Valuation
Citi Global Markets did the market value for Grameephone and rated it in the neighborhood of $3.5 billion in early 2007. Then Anders Jensen, Grameenphone's CEO, valued it at $3.2 billion. The valuation was done at the right time when Grameephone had a nice market share and VOiP operations to fuel its profits. Now its 2008, when Grameenphone's VOiP operations does not exist. But then Citibank is the underwriting bank that handles the IPO.

Predicted negotiation results:
This is what will happen at the negotiation table with the SEC, which is designed to make the stock look like a complete steal.

Resolution 1: A 900% stock premium. Total price of stock will be 10 taka. An amazing deal considering you had to pay 18 taka earlier. This is reduction is taken in consideration for small investors, as already done with the 18 taka proposal.

Never mind the SEC's history of not allowing any stock premium over 25%. 900% premium sounds like a steal when compared to a 1700% premium.

What predicted negotiation results mean for you?
Relax. For a 25% dividend you are getting a staggering 2.5% return on your investment of 10 taka (when compared to 1.38% with 18 taka stock). You just have to learn to ignore the double digit inflation, returns on other stock and bank savings and FDR rates. Grameenphone IPO is a godsend.

Dividends may exceed 25%
It may, it may not. But regardless of this step, Telenor will still be cashing out. The IPO was designed to look like it was meant for the poor, but instead it is making money off the poor.

What will Telenor do with the IPO?

Not only does the Grameenphone IPO has a 1700% premium attached on it, it also gets Telenor $300 million to fool around with. (As a sidenote, companies give dividends on the face value of a share, so a 25% dividend will yeild you Tk 0.25 for a Tk. 18 investment). So what will Telenor do with this cash?

Just for comparision, Grameenphone makes around $150 in profits a year, of which they get to send $75 million to Oslo. So this IPO is bigger than their profits, so to speak.

Invest in another industry
Makes the least sense, but still something Grameenphone would like to do. They already have a huge network of retail centers which they could use for better things. This could include a remittance or other retail services such as insurance. But given the current headaches that they have with their sliding market share, its better to focus on what they know best.

Buy Spectrum
This is the obvious choice to adding more users. Reserve more spectrum than what Grameenphone really needs. Yes spectrum is like real estate, and the prices can only go up in the future as Banglalink and AKtel gear up.

Invest in Bangladesh
The Fixed Deposit rate in Bangladesh is at a all time high, just hovering below 15%. This may make good sense to invest the money in an account and continue to get a nice yeild.

Invest in the stock market
Yes, not only the stock market, but in their own stock. Play with it a little. Push it up then sell, sell, sell. Only the small investors are set to lose money. This strategy was useful for many stock brokers (mainly those associated with a bank).

Invest in infrastructure
Very UNLIKELY. You can forget about a Grameenphone 3G network. The only reason Citycell stopped providing the outdated AMPS network was because no one would produce an AMPS phone. Same goes to Grameenphone. They will not invest in upgrades. You can also forget about network expansion as you can't really expand beyond Bangladeshi borders. (Maybe try running a secret VOiP in India?)

Buy Teletalk
The only compatible company that has more spectrum than it really needs. SK Telecom is also bidding for a piece of Teletalk. Would make sense if Grameenphone to pick up this company as soon as possible.

Send money back
Telenor has had a very tough year. They blame the Asian market for slowing down while their home market is still solid. You can see in the 6 month stock price (on the NYSE) graph on the left, what's going on with the Telenor stock.

Telenor Pakistan didn't do too well despite a lack of VOiP activities. The 20 million customers landmark in Bangladesh was achieved under some duress. They reduced their outlook. But still its nothing as major as a lack of cash.

What do you think they should do?

Grameenphone finally goes public

Grameenphone's new IPO is the talk of town. Its a $300 million IPO, the largest ever for Bangladesh. The foreign press still considers the Bangladeshi stock market to be too small to be considered an 'emerging' market. They prefer the term 'frontier' market.

A $300 million IPO is not small for Bangladesh by any means. To put this into perspective, the record holder was Shahjalal Bank who had an IPO of $13 million (for a 50% stake). GP's IPO is for a 10% stake. Citibank is the manager to this issue, but there are some funny things happening.

A $300 million IPO (for 10%) would value Grameenphone company at $3 billion. Citi Global Markets (a division of Citigroup) did the valuation in early 2007 when it valued Grameenphone at $3.5 billion. Then it was reduced to $3.2 billion. Is it not funny that Citibank is the manager to the issue while its sister concern does the inflated valuation?

Why Inflated?
Citi Global Markets has not noticed that the playing field has drastically changed from early 2007 to July 2008. Grameenphone's slide continues as its profits continue to decline at an alarming rate. (GP keeps blaming it on fines, but we all know VOiP took a major chunk out of its profits). GP was conveniently valuated at its peak, which right now, they are far from it. Citi Global Markets does the valuation, Citibank picks up the check. Get the drift?

AKtel has a new Tk 1 plan where it shows they are about to get serious. And Orascom's Banglalink is no exception. Orascom seems to have more infrastructure set up globally to rival Telenor's expertise

Strategy of the IPO
Chances are the valuation will stay inflated. Telenor is really smart about the IPO. If any outsider gets hold of 10% of the share, they may raise objection at board meetings. It is especially dangerous if the billionaire patriarch of Orascom, Naguib Swariris, decides to swoop into that 10%. Don't get me wrong, anyone will want that scenario but Swariris has more to gain from this and he will do anything to fight for a board seat (kind of like Carl Icahn).

Swariris is very canny about his deals, which he executes with lightening pace. Telenor wants to prevent this sort of situation by placing a staggering $150 million (HALF of the IPO) into private placement. Chances are its being placed with people they know won't sell.

Its a big IPO, but not much when you factor these precendents.

Immediate Results
All the stocks as a result of this news rebounded. The ugly duckling of the Dhaka Stock Exchange, Mutual Funds even rebounded because 10% of the public IPO would be spread into their hands.

In the long term will the stock market continue to grow? YES, there is $8 billion worth of remittance being sent to Bangladesh. And stock market (usually blue chip stocks) are the best place for these investments.