Dangote Cement: Debt Capital and Share Buyback

#Dangcem is replacing ordinary shares capital with debt capital in a sense. The company had earlier announced that it will continued with the share #buyback arrangement that it initially executed a first tranche in December 2020. The plan was to buyback 10% of its #shareholding from members of the public but the company only succeeded in acquiring only about 0.24% in December.

While the share buyback plan is ongoing, #Dangote Cement has just announced that it has successfully raised a N50 billion naira first tranche #bond Capital at the market. The question then is, why is #Dangcemt reducing its share capital and simultaneously increasing debt capital (bond)?
These are some possible reasons:
1. Dangote's personal percentage holding increases in proportion to the shares buyback arrangement;
2. earnings per share #EPS increases as a result of the buyback.
3. injection of debt capital offers tax advantage to #Dangcem because loan interest is tax deductible while dividend is not tax deductible. Hence bottom line is improved upon.

4. Agency cost of capital is put to check as a result of injection of debt capital into the #capitalstructure.
5. Weighted Average Costs of Capital #WACC, becomes lower and projects hitherto that may have been rejected for not meeting the minimum returns may now be feasible for execution.

6. Financial Engineering: End of Tax holiday and injection of debt capital- this perhaps is the major reason #Dangcem is injection more debt capital and engaging in share buyback. Tax holiday aka pioneer status has come to an end hence it makes more financial sense to introduce debt capital into the capital structure to take advantage of tax deductibility of interest on loan. Hitherto, during the tax holiday, introduction of bond offers no tax benefits to the company.
#financialengineering #capitalstructure #peckingordertheory #bond #smartmoney

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