Evonia Muzondo

DIVORCES are by their nature messy and acrimonious. When the tripartite merger of Kingdom Financial Holdings (KFHL), Tanganda Limited and Meikles Africa Limited was consummated, investors were promised the sky by the promoters of the merger. The move was to solve a lot of problems for Meikles Africa and KFHL and do very little for Tanganda unfortunately. The marriage did not last, however, and the separation was not a clean break as it were. At one time John Moxon was put to pasture, having to hibernate in South Africa.

As they say, whilst it might take long, problems eventually get solved. Finally, in 2010 John Moxon was able to resume his duties as chairman of the Meikles Group. The position has executive powers. As happens when a bull that has been ostracized returns to its herd, it takes care of all the contenders and pretenders. First to be shown the door was CEO Brendan Beaumont, who had been appointed after the departure of Nigel Chanakira. Next to go was Andy Mills who was in charge of Tanganda, whilst the head of Meikles Stores, Fidelis Goredema also departed under a cloud.

Having cleaned the house, Moxon ensured that the deal with Pick n Pay is taken to a higher level. In this regard, the South African entity increased its shareholding in TM Supermarkets to 49% from 25% by purchasing the additional shares from Meikles Limited for US$13 million, giving an implied value of the supermarket chain of US$54 million.

Step Number Four in the Moxon comeback was the announcement that the Moxon Group had consolidated their shareholding into one non-resident entity, Gondor Capital. The shares were fragmented at the time of the merger with KFHL. As such, a local entity, Meikles Consolidated, has changed into a non- resident entity, Gondor Capital. In any case, due to the indigenisation legislation, the Meikles family’s shareholding in the company was not indigenous so there were not any advantages of maintaining it on the local register. This move, according to the notice, is expected to assist Meikles Limited to mobilise upwards of US$200 million for capital investments, which should change the fortunes of the group going forward.

Yesteryear Meikles Limited was a bellweather stock and a darling of fund managers. At its peak the group’s market capitalisation was US$350 million before its nuptials with then associate company KFHL. Meikles’ market capitalisation is a mere US$50million, after dropping to an all time low of US$36 million a few weeks ago.

The company has been trying to rebuild its image after its separation from Kingdom, but a combination of lacklustre financial performance and the economy’s troubles has made the road tough. No doubt the indigenisation regulations have stood in the way in terms of mobilising funds to recapitalise and fund the operations.

This has seen the company being saddled with debt of approximately US$60 million. Operationally, the supermarkets appear to be the only blue sky of the business, with the other divisions facing a number of challenges. The coming on board of Pick n Pay into TM Supermarkets in the final weeks of 2011 might have come a little too late as other retailers had already made inroads into distribution and have gained some competitive advantage. 

It will be interesting to see whether customers will be drawn by the Pick n Pay brand or if competition will ultimately depend on pricing. It is quite possible that pricing will be the deciding factor as consumers are increasingly hard-pressed for cash. Whilst the brand is important in sparking interest, it is less important than value for money when it comes to building customer loyalty. The product offering might also not be very different as most retailers import from SA.  Because of the fierce competition in the sector, profitability depends on maintaining high volumes and containing operating costs and shrinkage, which has been the Achilles’ heel for management.

In the hospitality division, Meikles Hotel has been experiencing reduced occupancies and room yields due to the significant slowdown in formal business and international tourists, and this has negatively impacted on the demand for five star city hotels. Victoria Falls Hotel, jointly operated with Afrisun, seems to be doing well. Cape Grace, which was an attractive investment in the group’s hotel portfolio, has been put up for sale as a result of reduced room rates and occupancies following the oversupply of rooms in SA after the World Cup.

Management feels that the company will be better off exchanging shares in Mentor, a group in SA involved in airport catering, for the Cape Grace Hotel. Would it not have been beneficial for the group to sell the hotel for cash instead to be used for group capex needs? What benefits will Mentor bring to the group? Who are the main shareholders in Mentor and are they a related party? This has not been clearly elaborated by management.

Turning to the department stores, they have struggled to find relevance in the market and the model is being reviewed and operations streamlined. Under the new model, different products will be offered under one roof. The plan is to have a franchise of other regional retailers. Whether the model will work is another thing but both the existing and proposed operating models for the department stores seem likely to present problems. Streamlining is a welcome move but the franchising of international brands comes with costly fees. It appears to have failed to work in Black Steer (along with Bulldog’s Pub) and Clicks. Again, at the end of the day, it all comes back to prices.

Operations at Tanganda are being diversified to include other produce besides tea, which seems to be making losses. However, based on the financial results of other agro-processors, produce such as macadamia nuts and coffee may not be so profitable either.

In the latest published interim results to September 2011 the group had an operating loss of US$2,3 million and finance costs of US$4,3 million from mounting debt.

As seen with other listed companies, debt is the number one risk factor and news that the ‘newly’ rebranded shareholder will help bring funding to the table was cheered by the market as evidenced by the recent rebound in the share price. Obviously, the sweetener for the Moxon Group to externalise their shareholding, given the issues around indigenisation, must have been the huge figures for funding being touted.

How Gondor plans to raise the money is still unknown. Being the major shareholder, the financial survival of Meikles is at their heart’s core as they will benefit in the long run. But how about other shareholders? Will they also benefit? Will the money benefit Gondor itself or Meikles and other shareholders?

We have had examples of certain foreign listed entities with investments in Zimbabwe who have used these investments to mobilise funds which have been used for other ventures instead of recapitalising the assets that have been used to raise the money in the first place. Could it be possible that Gondor will instead gain the blue chip status that Meikles once enjoyed or will the outcome be the resurrection of Meikles? In other words, will the newly branded Moxon Group do the magic trick?

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