From mergers to demergers to mergers

By Admire Mavolwane

FROM the 1970s right into the late 90s, being a conglomerate was the in-thing. There were – and still are – historical and strategic reasons for this once popular corporate structure not

only here in Zimbabwe, but the world over.


Investing in otherwise diametrically opposite business entities either through acquisition or Greenfield projects was seen by cash-rich companies as yielding significant benefits by lowering business risk through diversification.


According to the 1997 Zimbabwe Stock Exchange Handbook, the conglomerate sector had 14 counters and was the dominant sector on the bourse.


Back then, the main ones were Commercial Industrial Holdings (CIH); CFI; Delta Corporation; TA Holdings; TSL Ltd; TZI; Acacia Holdings and Mashonaland Holdings.


Non-listed conglomerates included AngloAmerican Corporation and Astra Corporation. All these companies held investments virtually spanning all economic sectors.


For example, Delta had its interests classified into beverages, retail, hotels and miscellaneous whilst TA Holdings’ stable included Aroma Bakeries, Blue Ribbon Foods, United Refineries, Commercial Refrigeration, Cresta Hotels and Zimnat Insurance under its “core businesses”.


Aberdare cables, Cummins Zimbabwe, Sabata Holdings, Combine Cargo and TA Electric were accounted for as other businesses.


Associates comprised Sable Chemicals, ZFC and Nissan Clover Leaf.

Listing the businesses then owned by Mashonaland Holdings would take up another whole paragraph.


Various conjectures can be postulated as to why companies sought to spread their tentacles into every sector like giant octopuses.


It appears that most of the competition was based on the final outcome of who owned what – that is, which CEO ruled over the largest empire and hence held the bragging rights in town.


The trend reversed somewhat during the new millennium with the cliché “focusing on core business and unlocking shareholder value” finding its way into the vocabulary of every self-respecting executive.


Shareholders’ meetings at that time turned into mini-MBA lectures with a new crop of managers swiftly disabusing understandably startled participants of the notion that a Jack of all trades, ie conglomerate approach was best and passionately preaching the new gospel of core business, focus and competitive advantages.


The major drive towards leaner, more efficient structures and businesses was the realisation that resources and management time could no longer be spread evenly and efficiently at the same time. Even then, resources were becoming tighter and tighter.


However, some cynics say that the fad was driven by investment bankers, management consultants and academics who made fair sums advising companies and running studies and seminars on this phenomenon.


In order to facilitate smoother divestitures, de-mergers and management buyouts became the new buzzwords.


Admittedly, some of the sell-offs were, more often than not, forced rather than voluntary: as the business environment deteriorated, many operations began to bleed and could not be recapitalised as the holding companies were themselves short of cash.


Locally, Mashonaland Holdings embarked on a two-pronged strategy which involved the sell-off of minor subsidiaries and the de-merger of Powerspeed.

TA Holdings did not go the dividend-in-specie route back then, opting instead for the systematic disposal to management and other successful bidders.


Delta Corporation weaned itself from OK Zimbabwe Ltd, furniture retailer Pelhams and hotel group Zimsun through a dividend-in-specie.


The OK Zimbabwe transaction also included a private placement and initial public offering. The highly-successful and relatively controversy-free de-merger of Art, unlike that of Strategies Holdings from TZI, also included a management buyout.


Another high profile de-merger which was later dogged by litigation was the unbundling of Astra Corporation into Cairns Holdings, Astra Industries and Tractive Power Holdings.


A look at the historical time line will show that most of these corporate exercises took place in the period between 2000 and 2002, with the unbundling of the THZ group closing the now famous chapter.


The clock seems to have been turned back again, and for different strategic reasons, to acquisition.


Innscor, which has been on the prowl for a long time, is now emerging as the new ever-hungry acquisitor. Its major target in 2002 was CFI, negotiations for which were unsuccessful – for the time being.


Since then, the group has acquired a 36% stake in National Foods and is now the major shareholder in Colcom, controlling it with 77% of the shareholding.


Innscor now has (disclosed) interests in fast foods outlets, bread baking, Spar corporate stores and franchises, product distribution, crocodile skins, credit retail, white goods manufacturing, biscuit manufacturing, television sets assembling, pork production and retailing, tourism as well as running two corporate headquarters.


CFX Financial Services could have been under the group’s umbrella were it not for its high-profile collapse late last year.


Ariston Holdings, a listed horticulture and floriculture concern, had at one time appeared on the group’s radar screen. The group is still on the acquisition trail as evidenced by the snapping up of non-listed entities WRS and IRIS Biscuits, as recently as the first six months of this calendar year.


Recent full-year to June 30 results of the group show the impact of the partnerships that the group has entered into, whose earnings are exceeding those of wholly-owned subsidiaries.


Group turnover grew by 278% to $2,2 trillion with the agro-processing sector, which comprises Colcom and the Niloticus Crocodile Farms, being a major driver to the growth in revenues, particularly the consolidation of the former.


The manufacturing sector was sluggish whilst performance in distribution and retail was subdued.


Operating margins shed two percentage points to 21%, resulting in the corresponding profits increasing by a diluted 246% to $458,6 billion.


The diverse range of products and sectors obviously had mixed fortunes in as far as margins were concerned; bread manufacturing and retailing is the one that easily comes to mind as the product price is heavily controlled.

Losses in the regional operations obviously did not help.


On the contrary, the inclusion of $61,7 billion worth of non-cash profits as a result of compliance with biological assets revaluation (IAS41) of the crocodiles and business combinations (IFRS3) goodwill from the acquisition of Colcom of $22,2 billion and $39,5 billion respectively, came in handy.

Interest income increased by 2,5 times to $57,5 billion as the group’s cash pile remains its key attribute although its capacity to generate it was weak judging by the limp 27% growth in cash generated from operations.


A very strong $125,3 billion contribution from associates National Foods and Colcom in the first six month as well as Shearwater compared favourably with $29,1 billion in the prior year and was a welcome shot to the bottom line.


Attributable earnings of $387 billion were realised, up 235% on the prior year.

The focus for growth remains both organic and acquisitions with a number of possibilities currently being looked at.


However, regional operations which are still to perform to expectedlevels, having pre-judiced shareholders of approximately $10 per share in the last financial year, are a pimple on an otherwise spotless face.


In an effort to try and turnaround these operations which were previously touted as an engine for growth, a high level team of managers has been deployed. 2006 will hopefully see a positive contribution from the diaspora.


In the final analysis, one thing which really stood out from these numbers is the fact that acquired businesses and partnerships have tended to do better for Innscor than its wholly-owned subsidiaries and greenfield ventures.

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