An effective short sell research negatively impacts the brand equity, OMV, and credit worthiness of the targeted company; and can set in motion a vicious cycle featuring margin calls in tandem with stock devaluation, as well as thinning of the order book. It also makes the company vulnerable to punitive legal actions that include fining of executives and filing for bankruptcy. African, Indian, and Chinese PTC that benefit from American financing are optimal targets of short selling research because of their higher statistical probability of non-compliance with accepted accounting, governance, and ethical standards (and rules). Some of them engage in fraud, including accounting fraud (e.g financial statement fraud ) and compliance fraud (e.g tender fraud). Fundamental analysis usually exposes such non-compliance. This post hints that Safaricom PLC – which indirectly benefits from financing from the tech-heavy NASDAQ (via ADR) – is a suitable candidate for short-selling due to compliance and governance issues that can be easily exposed by qualitative fundamental analysis. Critics of short selling blame it for distorting or manipulating the securities market, besides creating bad publicity for the targeted companies. However, short sellers would have exposed the acclaimed InfoSpace, Inc (which was improperly valued at US$31 billion) and Excite (formerly Architext) as unprofitable companies, and saved American investors from losses. So, is research-backed short selling good or bad for the capital market? Does it make the financial market more efficient through price discovery?
Adani Group and Safaricom Group
On November 21, 2024, the Government of Kenya (GoK) dropped its controversial US$2.5 billion deal with the Adani Group, much to the delight of millions of Kenya with Kenyan parliamentarians celebrating in parliament. Some Kenyans attributed this cancellation to the intense activism led by a Kenyan living in France, Nelson Amenya. However, the truth as President William Ruto of Kenya put it is that GoK reached its decision to cancel the controversial Adani deals on “new information provided by investigative agencies and partner nations”. Though Ruto never explicitly mentioned the identities of the investigative agencies and the partner nation(s), it was explicit that he was referring to the indictment earlier on the same day (November 21) of the Indian billionaire, Gautam Adani. It was not activism by Kenyans that led to Adani’s indictment in New York by American prosecutors, rather this indictment followed an investigation launched consequent to the publication of a research report Hindenburg Research on January 24, 2023. This report was titled, Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History.
Taking inspiration from Hindenburg Research and other activist short sellers, Kagirison Research will be publishing a report on Safaricom PLC under the title, Safaricom Group: The Chimeric Entity with Uncertain Future that is Careening on Legal Minefields. The report will follow the ethical and professional guidelines of activist short selling reports, including applying fundamental analysis, governance research, technical analysis, and revelations of potential compliance fraud to generate the report.
Kagirison Aleatory Loan Derivative
Kagirison Research is not focused solely on activist short selling as proved by the fact that it will be publishing details of a new financial instrument that I have developed. I call this financial instrument the Kagirison Aleatory Loan Derivative (KALD).
KALD has benefited from the principles of conceptual engineering, and it aims to allow banks to get the loans they have issued paid back, while the loanee potentially benefits by being able to repay their entire loan at a small aleatory price. Let me explain using an example, consider a person who has used his house as collateral to get a loan of US$ 1,000,000. KALD allows this person to use about $1000 to repay back his entire loan, with the bank making about $2,000,000 from this loan. I will provide more details about KALD in a later dedicated post. For now, the focus is on research-backed short selling, which is one of the activities that Kagirison Research advocates for.
When Activist Researchers Come Knocking
Adani Group is not the first company to lose value and have its chairman, founder, and other executives indicted due to research reports by activist short sellers. Brilliant research published by activist short sellers have driven multi-billion dollar companies to bankruptcy, a fate that Adani Group escaped though it lost $150 billion following the publication of the abovenamed research by Hindenburg Research. However, Sino-Forest Corporation was not so lucky.
In December 2010, Sino-Forest Corporation was valued at US$ 5.7 billion and was listed on the Toronto Stock Exchange under the ticker symbol TRE. In the same month, Muddy Waters Research was working on its 39-page report that was published on June 2, 2011, under the title, Muddy Waters Initiating Coverage on TRE.TO, OTC:SNOFF – Strong Sell. The share value of Sino-Forest Corporation plummeted the same day the report was released, with a prominent investor in TRE stock, John Paulson, suffering a loss of $720 million. This loss of share value qualified this report as a negative research report on TRE.
Muddy Waters Research argued that TRE (cashtag $TRE) shares were penny stocks, despite $TRE raising $3.05 billion from the capital market, with $1.892 billion raised from bonds. Sino-Forest Corporation rejected the research finding and called on one of the Big 4 auditing firms (and the second largest professional services network), PricewaterhouseCoopers International Limited, to launch and publish its own investigation on TRE. {The other three Big 4 auditing firms are KPMG International Limited, Ernst & Young Global Limited, and Deloitte Touche Tohmatsu Limited (which is the largest professional services network)}. PricewaterhouseCoopers agreed to conduct the probe and release its report at the end of 2011.
Weeks after this report by Muddy Waters Research was released, S&P Global Ratings (a credit rating agency [CRA]) downgraded the corporate credit rating of Sino-Forest Corporation from BB to B+ and then B on August 23, 2011. On August 26, 2011, trading of TRE shares was suspended by the Ontario Securities Commission (OSC), which regulates the securities market in Ontario, Canada. (Toronto – where the Toronto Stock Exchange is based – is the capital of Ontario province). After halting the trading in TRE shares, OSC called for the resignation of 5 directors of Sino-Forest Corporation (though this was legally rescinded).
The auditors of Sino-Forest Corporation was Ernst & Young Global Limited, and they resigned from this role on April 4, 2012. This was after the company (TRE) filed for bankruptcy protection on March 30, 2012. A day before filing for bankruptcy protection, an irate Sino-Forest Corporation had filed a defamation lawsuit against Muddy Waters Research and demanded $4 billion in damages. This lawsuit went nowhere. However, a class action lawsuit that was initiated against Sino-Forest Corporation and its auditor (Ernst & Young Global Limited) was settled in 2015.
In 2013, Ernst & Young Global Limited agreed to settle the lawsuit by paying $117 million. In July 2014, the former chief financial officer (CFO) of Sino-Forest Corporation, David Horsley, was fined $700,000 and banned from ever holding any director position in any publicly listed company. Horsley would later pay an additional $5.6 million to settle the case against him.
In March 2018, the co-founder and chief executive officer (CEO) of Sino-Forest Corporation, Allan Chen, lost a $2.6 billion civil case brought against him by Cosimo Borrelli and other litigants in 2014. By 2018, the collapse of Sino-Forest Corporation was complete. This shows the power of short sell reports, especially when they are produced by brilliant and tenacious researchers. However, not all short sell reports lead to bankruptcy of a publicly listed company (PLC). Others have narrow focus, for example, to force the CEO out of the company and have him/her fined as well as barred from ever sitting in the board of directors of any PLC.
Safaricom PLC
Now, compared to Sino-Forest Corporation and the Adani Group, will Safaricom PLC suffer a similar fate if Kagirison Research publishes its report. According to me, this is highly unlikely though its CEO will likely be sued if this Kenyan company is to continue benefiting from the capital markets, though this is contingent on the report of Kagirison Research being factual and legally valid (i.e it should not use information obtained illegally).
GoK owns 35% of the 40.07 billion outstanding Safaricom shares, and thus will try to defend Safaricom Group from suffering catastrophic damage. Likewise, Vodacom Group Limited and Vodafone Group PLC own 35% and 5% respectively of Safaricom’s stock, and would likely come to its aid.
Vodacom Group Limited is a telecommunications company listed on the Johannesburg Stock Exchange with the South African Government holding a minority stake at 13.54% while Vodafone Group PLC holds the majority stake at 65.1%. The OMV of Vodacom Group Limited on December 22-23, 2024, is 209.43 Billion Rand (or US$ 11.35 billion based on exchange rates on December 23, 2024). Vodafone Group PLC is a British telecommunications company listed on the London Stock Exchange and secondarily on NASDAQ where it is traded through American Depositary Receipts (ADRs). The OMV of Vodafone Group PLC on December 22-23, 2024, is 17.02 billion Great British Pounds (or US$ 21.30 billion based on exchange rates on December 23, 2024). Exchange rates used in this post are provided by XE.com Inc; while data used for OMV calculation is provided by The Financial Times Ltd.
It is clear that Vodafone Group PLC has significant stakes in ensuring the viability of Safaricom PLC, as well as ensure that Safaricom’s governance structures and policies are updated to reflect globally-accepted standards, especially if Vodafone does not want to jeopardize its access to the American capital markets.
At the moment, Safaricom PLC generates most of its revenue from its SMS-based mobile money transfer and payment services that is designated as M-PESA. SMS simply means short message service, which allows for text messaging for mobile phones connected to a mobile network.
In 2023, MPESA generated Kenya Shillings (KES) 140,006.7 million, as compared to KES 80,541.1 million, KES 63, 236.2 million, and KES 12,319.2 million generated from voice, data, and messaging services respectively.
The OMV of Safaricom PLC on December 22-23, 2024, is KES 705.15 billion (or US$ 5.45 billion based on exchange rates on December 23, 2024).
Safaricom PLC is the pillar of securities trading in the Nairobi Securities Exchange (NSE). This means that if Safaricom PLC loses value and its share price collapses, the OMV of NSE will decrease as its important indices, including the NSE All Share Index, NSE 20 Share Index, NSE 25 Share Index, and FTSE NSE Indices, will fall in value. The NSE will also become more illiquid as volume of trade decreases due to loss of investor confidence in the Kenyan capital markets.
