Get ready for the shooting Red Star

By Admire Mavolwane

WHEN the stock market is on the go, corporate transactions also start streaming in, the general view being that the time when shareholders and investors are most bullish, they are less li

kely to baulk at being asked to inject new funds into the businesses as they figure they are likely to get immediate capital uplift.


For the week ending Wednesday, the industrial index put on 21,5% to reach yet another all time high of 15 477 596,12 points. As a result of the buoyancy in the market all those companies that had forewarned shareholders that begging bowls would be extended and, as usual that their support was eagerly anticipated, came out in the open with firm proposals.


First out of the closet was Tedco that made public details of its renouncable rights offer. The group, after a 1 for every 10 consolidation which became effective on Friday last week is offering 47 488 462 shares at a subscription price of $500 per share.


The retailer is seeking to raise $23,7 billion that will be used in much the same way as the $11,7 billion raised in August last year. Back then, the group utilised a billion refurbishing the branch network, $3 billion on computerisation, $5 billion in redeeming a portion of the commercial debt, and $2,2 billion in working capital.


At the time of the offer, the group had over $15,1 billion worth of loans and many shareholders expressed their concern regarding the inadequacy of the $4,9 billion which was being channelled to the reduction of the debt position.


Many also predicted that in no time, the debt would have grown from the $10 billion balance – a figure which management had indicated was manageable – to almost double the amount. They were proved right as by 31 December 2004, these same liabilities had grown to $19,3 billion.


The debt has, however, been whittled down to approximately $12,7 billion thanks to improved management focus and operating environment.

Management intends to use $10 billion to retire the debt; $4 billion for capital expenditure with the balance committed to enhancing working capital and capitalisation of an associate on a $4,7 billion and $4 billion split, respectively.


According to the hedging concept, long-term capital should be used to fund long-term assets whilst short funds should correspondingly be used for short-term initiatives.


The fact that the management team that has, incidentally, been changing with the frequency that Real Madrid rotates coaches, has consistently come back to shareholders requesting for working capital does not inspire confidence.


General Beltings (Genbelt) also published details of its intended merger with Cernol Chemicals Zimbabwe and, subsequent to the merger, the undertaking of a rights issue. Currently, the chemical company is solely owned by SMM Holdings, which happens to be the controlling shareholder in Genbelt.


The tie-up will be effected by means of a share swap under which Genbelt will issue 68 847 894 million shares, which represents 77,5% of the current issued share capital of Genbelt.


There are the usual reasons advanced in favour of the transaction which include annual cost savings of $5,9 billion. The idea of creating an enlarged group, through adding an additional unit to the current operations of Genbelt, however, seems to have been the overriding reason for the merger.


After the unification, the new enlarged Genbelt seeks to raise an additional $55 billion, through the issue of 346 904 549 rights offer shares to existing shareholders on the basis of 11 new shares for every five held.


The proceeds of the offer would be used to settle the debt owed to the major shareholder, SMM, after the latter agreed to take over the foreign currency liabilities of Cernol and Genbelt, to the tune of $34 billion, and $12 billion will be used to beef up working capital. Of the $9 billion balance, $5 billion will be applied towards capital expenditure and transaction costs account for the rest. The subscription price, at $160 per share, would be at a massive discount to the current trading price of $350.


Hopefully, this will be the last time, we will be seeing the Bulawayo-based rubber-begging bowl. The precedence set by Tedco should not be encouraged or tolerated by shareholders, especially minorities.


ZSR Limited finally unveiled the long awaited listing timetable for its wholesale division, Red Star/Advance Wholesalers. It is anticipated that the company, Red Star Holdings will be listed on the Zimbabwe Stock Exchange on January 3 next year through an initial public offering. The offer to the public is expected to raise approximately $271 billion. It is not yet clear, however, whether or not ZSR will reward current shareholders through a dividend-in-specie.


The group, having issued a cautionary a while back advising shareholders that results for the six months to September 30 would be better than expected, finally laid down the gauntlet for the September reporting period yesterday. The results were truly above market expectations, ahead of all but one analyst’s forecast.


Group turnover grew by 217%, to $1, 8 trillion, with the soon-to-be listed wholesale division contributing $1,1 trillion. Operating margins surged ahead to 13% from 6% as the group benefiting from inflation by reverting back to replacement cost pricing, operating margins surged ahead from 6% to 13%.


Sugar refining, previously the flagship business, suffered from negative margins and recorded a loss of $4 billion due to price controls, whilst Blue Star Transport recorded loss of $4,5 billion blamed on softening rates and diesel shortages. On aggregate, however, group operating profits grew by 576% to $224,8 billion.


As the saying goes, once burnt twice shy. After having been caught in a borrowed position last year and paying a net charge of $6,2 billion, management learnt its lesson and the group was in a net interest income position of $10.1 billion this year.


Attributable earnings were up a whopping 804%, to $159, 9 billion, compared with the $17,7 billion recorded in the prior period.


The favourable trading pattern experienced in the second quarter is expected to continue and this should see more enhanced earnings. The recent adjustment in the price of sugar and the general thrust of government policy towards abandoning price controls should be an added bonus to ZSR.


The tone for results has been set and the market now awaits the challenger – any takers for CFI?

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