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.

Slipping a Bit Too Much

The Dhaka Stock Exchange continues to slide and slide and this worries me. The market was up and running with great momentum in 2007, but now it is almost coming to a standstill. Standstill may still be an euphemism.

I had predicted this scenario a little while earlier here. But I did not think it would be this bad. What's causing this exodus from the stock market?

Economic reality settling in
We knew the economy was in for a tough time because of the food crisis, arrests and political changes. But it usually takes some time for the economic effect to appear in everyday lives. We should brace ourselves for what we merely heard as rumors as the effects are now in action.

On the right is the DSE Index for the last 30 days. I couldn't find the graph for the last 6 months because it would be too horrific and R rated for the DSE to publish.

Grameenphone's sham IPO
I will discuss why it is a sham a little later (still writing it up). But people are really hoping that they will be getting miracles out of this scenario. GP submitting their proposal to the SEC got the whole market bullish for 1 day. But then it continued to slide. (Maybe because people already figured out it was a sham)

Bank Fixed Deposit Rates
Now bank deposit rates are just shy of 15%. That means without doing anything you are getting 15% on the spot for your money, without any risks or worries. This is creeping out to be a contender for stock investments. The FDR rates will continue to rise as banks are reluctant to give loans and while they still think they are in a liquidity crisis.

Fall of AB Bank Foundation
Documented here. It still turns out they provided a large amount of credit/loan for each stock investment. For some time they got away with it, but then they got fined because they loaned too much. AB Bank Foundation were also involved in getting a piece of the lucrative pie. It turns out that they could also manipulate the stock by mass scale buying and selling. Again, AB Bank may not be much of a bank, but their Foundation beating all foundations out there. So 2008 Foundation of the year goes to AB Bank. A foundation that wasn't a drain to AB Bank, but actually managed to give something in return to AB Bank.

Picture on the right is a little funny. It is the signing ceremony where AB Bank would handle the securities of Trust Bank. Read the sign board in the background ; )

US Economic worries
The largest economic entity is in trouble and you think Bangladesh will be spared? Due to the wonders of globalization, when someone goes down the entire world is in the dumps.

Expansionary vs Precautionary

Bangladesh Bank in the last few weeks, rejected IMF's advise on following a conservative economic policy. But as with most issues in Bangladesh, people say one thing and does another.

Why IMF wants a conservative policy

• High inflation
• Investor lack of confidence
• Liquidity crisis amongst banks
• Food crisis
• Natural gas crisis
• Political crisis
• Power crisis
• Global economic slowdown
• ACC witch hunt against the corrupt
• Exodus of the business community
• Labor unrest/strikes
• Call rate is too high and fluctuates too often

Why Bangladesh Bank wants expansionary policy

• Bangladesh is smart enough to deal with themselves (micro lending is enough to show the world)
• A stunt to show its power
• To convince the banks (and people) that there isn't any liquidity crisis

Why Call Rate is important
Call Rate reflects the rate which banks lend to each other. Although it hasn't been high consistently there are some points to note. It is limited to 20% by Bangladesh Bank, so if it hits 20% we will never know the seriousness of the issue. The call rate also reflects the amount of deposits and money that banks have between themselves to work with and to distribute. This depends on multiple factors such as deposits, cash, successful loan payments, and interest rates. It is sufficient to say when the call rates fluctuate the way they are doing now something is terribly wrong.

This means that Bangladesh Bank is not clear to its goals. It may want an expansionary policy (which causes the call rate to lower) but when its actions doesn't suggest what it is saying, the call rate spikes. This also means that the commercial banks don't know what is going on or what to expect. So it means they are also less reluctant to give out loans and stay conservative at times of uncertainly. This also leads to more conservative economy. So do you get my drift? No one is sure what to do and aren't doing what they are supposed to do.

Reality vs Desirability
On one hand Bangladesh Bank does not want to startle everyone by taking a conservative path. It doesn't want to make a bad situation worse by taking a skeptical view. But then again can it afford not to?

Tata says tata to colonization

But Mittal is apparently still interested.

Tata formally withdrew its $3 billion colonization proposal from Bangladesh. They wanted to set up multiple industries if the government ensured them a gas supply despite a national gas crisis and disregarding all the other local companies that have been wanting more gas.

The Indian corridor
This withdrawal is also on the heels of India's corridor policy -to use Bangladesh in its transportation route to Nepal and Eastern India. But doing very little to help Bangladesh in the process. The government was right in this aspect of rejecting the deal.


Is it not funny that India, despite being a strong player in this region is detested the most in the region? It tries to muscle its way in one way or the other.

Bangladesh is too nationalistic, India isn't
The first thing to come out of the mouths of the FBCCI president, Annisul Haq, is that how this deal will 'tarnish' Bangldesh's image. Bangladesh is too nationalistic. But India is not, except that they had 3 decades of a nationalistic policy that prevented foreign companies to enter their country. They nurtured their own industries before they lifted their policy.

Industrialization vs Microlending
But Bangladesh does not know how to deal with its own people. It must open up, not to the world, but only India to declare itself a free-trade country. It also gets numerous visits from Gandhi Jr, and other Indian officials who are there to scout out Bangladesh's success in microlending whereas India is satisfied with its large scale industrialization and technology accomplishments.

No India does not want to make any sort of agreement regarding this advantage they have. All Indian officials are happy enough to observe the success of microloans. Bangladesh's strategy should be to expand micro loans to create a hoard of farmers, chicken farms and fish hatcheries. India will take care of everything else. India will take care of industrialization while Bangladesh continues to live in the Middle Ages.

Message to Annisul Haq, (he made his money on garments btw): Maybe power plants and fertilizer goes to Tata. What is preventing Tata from dumping another $3 billion on garments?

Final message
I am not criticizing India, I am just saying, India has moved beyond the feel-good economics of microlending to a point where their companies are setting up base in Bangladesh. Bangladesh can survive on microloans while India will rake in the billions. Unless Bangladesh changes its outlook and goals, it will continue this way. There needs to be more incentives for businesses in Bangladesh to expand and make money.

In case you were wondering, the pictures are of Indian Generals: Ratan Taka, Mittal, Ambani 1, Ambani 2. Bangladesh hardly makes the list or takes the pride of their businessmen. The Bengali tiger tears them to shreds whenever possible. India just likes to promote them. Now do you see the difference?

Foreign cattle/slaves get deported

Lets see what makes sense here. Kuwait's inflation is at an all time high of 11%. Laborers revolt (although they revolted violently and I don't support this type of street rampage) to force Kuwait to change its labor laws. The minimum wage is significantly raised to 40 dinars. Then they finally deport 217 (and still counting) workers back to Bangladesh for causing this.

The man pictured on the left, took out a loan for his travel expenses, cannot contain his emotions as he was forced out of Kuwait, with a huge debt.

What caused this rampage
In short, the food crisis. Kuwait's inflation is to blame a little, but the woes of Bangladesh continue to put pressure on its laborers abroad. Poor families just do not have enough to survive the high costs. This ultimately led to the worker's revolt. Also Bangladeshi laborers are used to revolting and burning down garment factories. Kuwait is nothing new to them, its just a procedure that they must follow.

Revolt, especially violent revolt, seems to be a Bangladeshi national past time these days.

What it means for the rest
Revolts will happen soon if prices are not adjusted to the prosperity that the middle east is gaining from this labor. Currently all foreign labors are treated, not like second class citizens, but like cattle. They have their own compounds and are routinely segregated.

Similar situations will follow because Kuwait, possibly under international pressure, caved into the demands (China is the good guy these days because of its benefits and the Olympics). Kuwait also is very inept in dealing with revolts, because lets face it, they have never faced a mass uprising because they never had the population 'mass' to begin with.

Soon these revolts will happen in other Middle Eastern countries that have this huge mismatch, and also because economic conditions for the poor get worse in Bangladesh every year.

The Decisive Quote
Asked about implication of Kuwait's new decision, Expatriates' Welfare and Overseas Employment Secretary Abdul Matin Chowdhury said implementation of the decision does not mean a stop to hiring workers. Kuwait now prefers hiring skilled workers, he added.

Something strikes me as wrong. When did Kuwait prefer 'skilled workers'? Does Kuwait have a software/engineering industry that I am not aware of? It has oil, and oil is a labor intensive project.

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?

Any time now ....

The stock market is due for a major crash. A $300 million Grameenphone IPO is headed its way and it is going to consume a lot of cash. Kudos to GP for timing this IPO correctly, right in the middle of a liquidity crisis. (I can only speculate about this liquidity crisis, as newspapers seem to run this story every few days).

The last biggest IPO was only for $13 million. Even though 1/2 of the $300 million GP IPO will be in private placement, it still means that the market will suddenly lack $300 million that was floating around. This is so small change my any means.

What will Grameenphone do with $300 million?
With the new precautionary and cost-cutting strategy they are more likely to buy spectrum with it rather than expand manpower. This means $300 million is hooked up in a service that doesn't yield much in terms of cashflow or employment. So more woes to continue for the Dhaka Stock Exchange.

Real Results
Sad thing is, even though the entire market will crash, nobody will recognize it because the GP stock will be more than enough to average out everyone else who sunk. The brokers won't lose money, they make it both ways, but the people who were manipulated to invest into particular stocks will. Watch Boiler Room to find out what currently happens in terms of speculation and manipulation with Bangladeshi brokers.