At the market with Tetrad – Anticipated review sells market a dummy

By Brian K Mugabe

THE industrial index, which had enjoyed daily gains since June 25 driven initially by the smaller caps before the big caps joined the fray to propel it towards the million-point mark, close

d at a record 957,081 points on July 16.


But then, as in the US where it is often said tongue-in-cheek that when the chairman of the Fed Alan Greenspan sneezes “the markets catch a cold”, the anticipated monetary policy review by the central bank governor had a similar effect on the local stock exchange.


The second quarter monetary policy review statement which had been widely expected to be delivered on July 22, triggered some profit taking on the ZSE as investors decided to crystallise some of their gains, memories of December 18 2003 evidently still uppermost in many minds!


During this bear phase volumes have been significantly lower than those seen during the rally in the past couple weeks, suggesting that by and large institutions have stayed clear of the selling that has dominated the market since Monday. From the all time high noted above Wednesday’s close of 836 284 reflected a 12,62% decline in just three days.


First Bank and Sare, the latter having just returned to the bourse after serving a one week suspension, were largely immune to the profit taking following the publication of the of their “merger” proposals. Details of the transaction were published this week, revealing that the first phase will involve a restructuring of First Bank, through the establishment of a holding company FBCH, which will be followed by the acquisition of Sare.


Ownership of First Bank will be transferred to FBCH through a one for one share swap thus making First Bank a wholly-owned subsidiary of the latter. Acquisition of the entire issued share capital of Sare will, in terms of the scheme of arrangement proposed by FBCH, be settled by the issue of scrip on the basis of 21 FBCH shares for every 10 Sare shares held. On completion of the transaction both First Bank and Sare will be delisted and FBCH will take over the current listing of First Bank.


Members of both companies will be asked to approve the proposals on August 11 First Bank shareholders through an EGM and Sare shareholders at a scheme meeting. Should the scheme of arrangement be rejected by scheme participants (Sare shareholders) an offer of acquisition by FBCH becomes effective from August 23 to September 10 on the same basis as the scheme.


Unlike in the past, where EGMs were routine and a mere discharge of protocols, recent experiences, like the Zimre EGM, where shareholders shot down the issue of scrip in settlement of the acquisition of a 21% stake in First Bank and the Intermarket/TA transactions, have meant that deals can no longer be regarded as done until the votes have been cast and all conditions precedent fulfilled.


Still on finalisation of transactions, the merger of Century and CFX was concluded with the listing of CFX Financial Services on Monday. In a valiant attempt to catch up with the bull run that its predecessor, Century, had missed out on due to its voluntary suspension, effected when the company was trading at $14 per share, CFX opened at $50 before closing at $48,80 on volumes of 2,3 million shares. It has since remained range bound between $40 and $45.


Lastly this week, we take a look at a listed company that has dominated headlines in the local media in recent weeks. Cottco last week gave a ‘trading update’ to analysts and investors on the performance of the company for the first two months of its 2004/2005 financial year as well as crop projections for the full year. National seed cotton production was projected to be around 300 000 tonnes, a 20% increase on the previous season, with the company’s share expected to increase from 58% to 70%.

Early this year, the company announced a producer price of $1,800/kg for grade ‘A’ cotton, which, according to media reports at the time, was well received by farmer representatives. However, a stand off was subsequently reported to have emerged between the merchants and the farmers over the viability of the price, the veracity of which seems to be questioned by the fact that Cottco had already purchased 70% of it’s estimated share of the cotton crop from growers just three months into the buying season.


These purchases were financed by $352 billion in borrowings, split into $59 billion worth of concessionary finance and $293 billion at market rates. The blended cost of funds was 111%, which had become a major concern for management as any upward revision in the rates relating to its market borrowings would have had dire consequences for the bottom line, hence the decision to suspend cotton purchases.


Following engagements with the monetary authorities, however, the company received approvals for the activation of offshore credit lines amounting to US$68 million, to be offset against its export receipts. These much cheaper borrowings are anticipated to reduce the blended interest rate to approximately 20%.In terms of earnings as at the end of May profitability was running six times ahead of the same period last year.


The update, thought welcomed by many investors in the spirit of availing information to the market, appears to have been motivated more by the adverse press reports pertaining to the short lived suspension of cotton purchases which had seen the share price come under some pressure.

Whilst this reassurance was a relief to shareholders of Cottco one still yearns for the day when information is availed for reasons of transparency, as opposed to just reaction to negative publicity.