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At The Market with Tetrad – Survival is the name of the game

By Brian K Mugabe

WHILE the trend on the Zimbabwe Stock Exchange (ZSE) over the past couple of years, and indeed internationally, has been the unbundling of large conglomerates into smaller, leaner, more foc

used units, here read the likes of Delta, Mash, and THZ, we have also seen though on a smaller scale, a move towards the integration of similar or synergistic business interests.

In our economic environment where sales volumes are declining as most markets shrink, this approach as discussed here can be hugely beneficial.

This integration is usually done by one of two methods, namely vertical or horizontal integration.

The former refers to the degree to which a firm owns or has an interest in its upstream suppliers and its downstream buyers. Examples of the potential benefits of this strategy for an organisation are improved supply chain coordination; greater opportunities for differentiation by means of increased control over inputs; the ability to lock in upstream or downstream profit margins and the creation of increased barriers to entry for potential competitors as well as becoming more competitive against existing ones.

Horizontal expansion can be achieved via organic growth, or by external expansion through mergers and acquisitions of firms offering similar products and services. Horizontal integration refers to the latter; that is the acquisition of additional business activities at the same level of the value chain.

Potential benefits of this approach include greater economies of scale achieved by selling higher volumes of the same product; economies of scope or synergies achieved by sharing resources common to different products and increased market power over suppliers of inputs.

A recent example of vertical integration is Innscor and its investments in Natfoods, while examples of horizontal integration abound, among these being Nicoz and Diamond Insurance companies, Dairibord and ME Charhons, ZSR and Advance Wholesalers and Medtech and the Baines Imaging Group.

Three transactions over the past month or so that sought to consolidate the positions of the parties involved in their markets and which we shall take a quick look at this week are those of PG and Zimtile, Clan and Pioneer Transport and the aborted Colcom and Cattle Company Holdings (CCH) merger.

Following the successful conclusion of negotiations, and the receipt of regulatory approvals from the Competition and Tariff Commission, PG announced that its wholly-owned subsidiary PG Merchandising, had effective July 1 acquired for $4,2 billion, 70% of the issued share capital of Gestap Investments.

Gestap, which trades under the name “Zimtile”, is involved in the manufacture of concrete roof tiles, concrete bricks, concrete walling, building and flooring contracting. The company was described as “having a significant share of the roof tile market in Zimbabwe”.

The Clan and Pioneer deal, which was ratified by shareholders this Wednesday at an EGM, will see Clan acquiring Pioneer, a complementary transport business, for a price of $7,5 billion.

The acquisition will be funded by a rights offer, the terms of which are that shareholders as at the record date of October 31 will be eligible to take up their rights at a ratio of 2,66 new shares for every one share held at a subscription price of $25 per share.

Clan’s core business currently revolves around intercity freight and local contract hire, with operations spanning cross border road freight distribution, overseas shipment of household furniture and courier services.

The acquisition of Pioneer will add to the enlarged Clan group, the Pioneer bus and truck divisions, which will provide a fleet of buses that service the major destinations across the country as well as long range luxury cross border transportation.

The truck division will add a fleet of trucks that specialise in the carrying of bulk dry goods and liquids, especially petroleum products. Following the rights offer, the enlarged Clan group will see its name changed to “Pioneer Corporation Africa Ltd”.

Colcom and CCH had looked to enter into a merger, a proposal which has since been revoked following the imposition of certain pre-conditions by the Competition and Tariff Commission that “would materially impact on the form and terms of the merger as originally envisaged”.

What was envisaged was that given the successful collaboration between the two companies in the Triple C pig-breeding joint venture in Norton, the two had decided to cement their relationship in a way that would ensure the consolidation of this project.

The transaction would also seek to diversify Colcom’s traditional pig business into the beef industry thereby mitigating the risks associated with the reliance on a single species.

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