Nigerian manufacturing businesses are struggling.
Cadbury Nigeria as a case study
Cadbury Nigeria products are popular in many Nigerian households.
Their confectionery and beverage products, like Bournvita, Tom Tom, Ahomka Ginger, Hacks, and Buttermint, are household names and popular among Nigerians.
But this is where it ends.
For a company that has this reputation, reach, and foothold in the Nigerian market, it is strange and anti-climax that the company is struggling for breath, struggling to stay afloat, and struggling to continue to do business in Nigeria against all odds and this is why:
Three years ago, Cadbury Nigeria ran out of dollars.
Dollars, as we know, are important and at the heart of every big business in Nigeria.
Dollars are needed by businesses operating in Nigeria to import new spare parts for the machines in their factories, to import new machines from abroad, to pay the suppliers of the raw materials they use for manufacturing, who are, for the most part, based abroad, and then to repatriate profit back home to the owners of businesses who are not based in Nigeria.
But this time around, Cadbury was not looking for dollars to repatriate profit back home to the UK, where the owners are living. They were looking for dollars to pay the suppliers of the raw materials who supply the raw materials that they use to produce Bournvita and Tom Tom.
Having run out of options on where to source dollars because the raw materials guys abroad are on their necks
They reached out to the parent company, who are the owners of the business in Nigeria but based in the UK, for help as the last option.
It was more or less like the Save Our Business message.
And the message was urgent and compelling.
Save our business in Nigeria by giving us a US dollar loan, or we die.
Cadbury Schweppes Overseas, the owners of Cadbury Nigeria, had an emergency board meeting, and the topic was how to save the Nigerian subsidiary from total collapse with the knowledge that if they did not act, Cadbury Nigeria would cease operations and go the way of GSK, Procter & Gamble, and Sanofi, which left Nigeria because of the same dollar issue.
An agreement was reached to advance a $23 million loan to the Nigerian Cadbury subsidiary operations, but the loan is not free.
Cadbury Nigeria will pay it back with an interest rate, and the total amount to be paid back is $26.3 million.
That is $3.3 million in interest payments.
Cadbury Nigeria was faced with two options.
1) Accept the loan with the interest rate
2) or close down their Nigerian business if they decline the offer.
Since Nigeria is an important market for Cadbury in Africa, the option to accept the loan was agreed upon with the belief that it would go better.
Since 2021 until now, Cadbury Nigeria has been struggling to pay back the loan to the parent company based in the UK.
What they were doing was buying the dollar at the bank for 430 when ever CBN provided the dollar to send to the UK.
Before this government took over power, the company struggled to pay back $18.6 million, remaining $7.7 million of the loan, and then the dollar went haywire when this government came in last year.
The loan they borrowed when the dollar was 450 at the official rate is now 730, double what they will pay.
This got worse last year when the administration of President Bola Tinubu unified the forex market, leading to the devaluation of the naira and putting further pressure on Cadbury Nigeria, resulting in an unrealized exchange loss of N20.6 billion and a loss after tax of N10.2 billion for the period ended September 30, 2023.
Let me explain.
Because the loan was borrowed at a rate of 450 to $1, the fact that it is now 730 to $1 means an automatic loss of 280 naira per dollar borrowed.
That was the reason for the unrealized loss of 20 billion, after tax of 10.2 billion naira for last year.
The company is expected to take another loss this year when they audit their 2023 financial statements, and they are expected to lose over 13 billion naira all tied to this dollar loan,
With the situation in the country not showing signs of easing anytime soon unlike what they thought in 2021, the Cadbury Nigeria board deliberated on options to clear its balance sheet, and it was agreed that capital reorganisation was the best at hand through the conversion of the outstanding loan into equity.
The board said this strategy would deleverage the balance sheet and reduce pressure on its cash flows, leading to improved liquidity, which could be channelled into better uses by the firm or returned to shareholders via dividends.
In layman terms, what the board of Cadbury Nigeria proposed to do is simple.
We know we owe our parent company in the UK a dollar loan that we can’t afford to pay back any longer. With the way things are in Nigeria and also, paying back the loan is putting pressure on our cash flow,
Let’s convert the outstanding loan to equity.
By equity, it means the loan owed will be converted to shares of Nigerian Cadbury listed at the Nigerian Stock Exchange.
With this, Cadbury UK will own more shares of Cadbury Nigeria than they already own, and Nigerian shareholder shares will be diluted for this to happen.
Cadbury Nigeria is not talking about profit now for its shareholders in the UK and Nigeria.
The concern and desperation is how to stay afloat and remain in business.
Profits can come later, when things stabilize in Nigeria.
When you juxtapose Cadbury’s struggle to stay alive with banks in Nigeria declaring bumper profits in the same economy, that Cadbury is struggling to stay afloat.
For instance
UBA declared over 100 billion in profit.
The same with Zenith
You shake your head, and you are reminded that Nigeria is a strange place to do business, and bizarre things happen in this part of the world.
