THE Cotton Company of Zimbabwe (Cottco) and government might have staged a major coup when they jointly took over Olivine Holdings but they still face a
mammoth task to recapitalise the company.
Cottco and government became the major shareholders in Olivine after Heinz Group pulled out early this year. Government now holds 51% of the company while Cottco has a 49% stake but will have the management contract under the deal.
Government has been pitching the deal as the beginning of the indigenisation programme while Cottco has been celebrating it as a form of diversification.
What has not been said however is that it might take a while before consumers start seeing Olivine’s 250 products back on the shelves. A confidential report done in the run up to the takeover states that the new shareholders will require at least US$5 million every month to import raw materials and spare parts.
The major imports are crude soya oil — a raw material for soap and candles. It is highly unlikely that this money will be available on the official market. At the time the report was done, the company was getting US$200 000 from the official market per month.
The new shareholders will need to invest a further US$6,5 million to increase the company’s production to at least 80% of its capacity utilisation. The document shows that sales volumes at the company have declined by 67% over the past six years due to lack of feedstock and foreign currency shortages.
“Future sales volumes remain under threat as chances of securing cotton seeds and Soya bean seed remain low,” the report said. The new shareholders inherited aging equipment that will need to be replaced for the company to raise its capacity utilisation to about 80%.
Most of the equipment was acquired between 1960 and 1979.
“There are several equipments that would require replacing with more efficient and higher productivity pieces,” the report said. Olivine at the time of the acquisition was running at 20% of capacity.
The delinting factory will require a complete replacement. This would mean replacing the 28 machines in the factory with seven modern ones. That would cost the new shareholders at least US$2,1 million. An extra US$300 000 would be needed every month to import maintenance spare parts.
Olivine’s oil expellers would also need to be replaced at a cost of US$600 000. Two new boilers will be needed and will take another US$1,6 million from the shareholder’s pockets.
“Total replacement expenses within two years will be US$4,5 million. This excludes the US$2 million for the refinery plant to be replaced after five years.”
The report said the main risk was on the plant refinery for cotton oil which is currently inefficient. “The main risk is the refinery plant for the cotton oil is inefficient, needs replacement after five years and if a component breakdown occurs any time a total of US$2 million will be required to replace the plant.”
Even if the shareholders have that kind of money they will face an even bigger problem because the components were manufactured by an Israeli company which has since closed.
Olivine’s computer system is also very old, the report said. “The system has no local vendor support and the chances of future upgrade are remote. This therefore represents an urgent cash outlay upon takeover.”
The shareholders will also have to find new brand names for their products because the bulk of the goods made by Olivine are registered trade marks belonging to the Heinz Group. Buttercup, Jade, Daily Dolphin and Lunar are some of the product brands that the new shareholders will not be allowed to use.
Analysts say beyond these refinancing issues shareholders will need to agree on a common vision, something they seem to lack at the moment. The two shareholders don’t seem to have the same agenda. Cottco, which has the management contract, is driven more by profits and the need to enhance shareholder value as a listed firm.
Government on the other side seems to have a totally opposite idea. For instance the government has insisted that all prices of basic commodities should carry a margin of 20%.
With a controlling stake of 51% government is likely to dictate the pricing structure of the company. This would mean more losses.
This has been the case with Zupco which is jointly owned by government and listed Zimre.
The report said the shareholders will need to raise more funds to adequately insure the company’s assets because the current values were understated so as to pay less premiums. “Higher insurance premiums will have to be paid after takeover based on proper asset revaluation.”
The shareholders will also need to deal with human resources issues.
“About 50 employees at various levels, including four at senior management level, have reached or are nearing normal retirement age, thus engendering the issue of succession planning and general manpower planning,” the report said.
Olivine owns Oilseed Processing (Pvt) Ltd, Willovale Properties (Pvt) Ltd, Olivine Industries (Pvt) Ltd and Chegutu Canners. It also owns Zimbabwe Oil and Soap Industries (Pvt) Ltd.