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Holding Company Structure and Strategic Business Acquisitions /Market Entry
Earlier this week the GMD Herbert Wigwe, announced that we had received the Central Bank of Nigeria's Approval-In-Principle for a holding company (“HoldCo”) structure. To enable us further deliver our objectives around business diversification, improved operational efficiencies, talent retention as well as robust governance.
Further to this announcement, we thought it would be helpful to break down what this means, to aid understanding of the Bank's strategic business acquisitions.
What is a holding company ('Hold Co”) structure?
A holding company is a parent business entity, usually a corporation or LLC that doesn't manufacture anything, sell any products or services, or conduct any other business operations. Its purpose, is to hold the controlling stock or membership interests in other companies. However, in many jurisdictions around the world, holding companies are usually called parent companies, which, besides holding stock in other companies, can conduct trade and other business activities themselves.
There are different reasons why holding companies are used. Below are a few:
1. Liability protection
Placing operating companies and the assets they use in separate entities provides a liability shield. The debts of each subsidiary belong to that subsidiary. A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary.
2. Control assets for less money
A holding company needs to control its subsidiaries but doesn't necessarily need to own all shares or membership interests. That allows the holding company to obtain control of another company and its assets at a lower cost than if it had acquired all of the subsidiary's ownership interests.
3. Lower debt financing costs
A holding company that has financial strength can often obtain loans for a lower interest rate than its operating companies could themselves, particularly where the business in need of capital is a start-up or other venture considered a credit risk. The holding company can obtain the loan and distribute the funds to the subsidiary.
PAGE 9 INSIDE ACCESS | OCTOBER 2020 2ND EDITION