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Diversity causes merger problems

Shakeman Mugari

THE current problems with the Kingdom/Meikles Africa deal arise from the fact that the parties are trying to merge totally different companies.

The proposed merger of Kingdom, Meikles, Tanganda and Cotton Printers is probably one of the most diversified mergers to ever come out of the market. It is this diversity that seems to have created problems for the deal. The parties are trying to mix a
tea-making firm, a bank and a hospitality company. Given such a mix, it is not surprising that the deal has generated a huge debate in the market.

Already there is a dispute over the valuations of Kingdom and Meikles in the merger. The root cause of the problem is that the companies are totally different.

Meikles is best known for its hotel businesses which include Victoria Falls Hotel, Meikles Hotel (Harare) and The Grace (South Africa) which is one of the most successful hotels in Africa.

It also owns TM supermarkets, Barbour’s and Greatemans department shops.

The company has a fat bank account which includes US$33 million held by the Reserve Bank of Zimbabwe. Meikles’s value is therefore more apparent in real asset.

Even though the goodwill might have accumulated for the past half a century, its value is not that huge.

On the other hand, there is Kingdom, a financial institution, whose business is all about gearing. A bank does not need huge assets in order to survive and make profits.

By the nature of the banking business, Kingdom can lend $10 even if they have a $1 in the pocket. It is mostly about goodwill. The problem then arises when one wants to come up with a price for the two companies to merge in a way that satisfies the respective shareholders.

It is not surprising therefore that valuation has been a sticking point in the deal. Kingdom believes the results of a valuation that found it to be half the value Meikles is correct. The valuation was based on the market capitalisation. Given the figures on the market this week, it seems that valuation has endured. As of Wednesday this week, Meikles was at 1 080 134 794 while Kingdom was at 370 234 456.

Old Mutual believes that Meikles is actually between 12 and 22 times larger than Kingdom. They have used net asset value, price earnings and adjusted market value to come up with the price.

The second problem is that the drivers of the deal are also quite diverse. There is Nigel Chanakira who sees this deal as a chance to transform his 17% stake in Kingdom into something big. That is how rational humans behave.

His shareholding might be whittled down to 2,5% when the deal is finalised but the fact is that it is a stake in a bigger and diversified company.

Strive Masiyiwa who through Econet owns considerable shareholding in Kingdom might see it the same way as Chanakira.

The Meikles family stands to benefit either way because of their shareholding in Kingdom (33%), Tanganda (55%), Meikles (55%) and Cotton Printers (100%). This means whatever value might be reached, the Meikles family will benefit somehow.

Old Mutual have a different view. They are investing on behalf of about 500 000 policy and pension holders. They therefore need to create value for them. They are driven by the desire to get long term value for the clients.

The other major problem is that the issue has become emotional.

Kingdom believes that Old Mutual is out to block the deal. To support this argument they claim that Old Mutual had refused to follow its right during Kingdom’s last right issue.

To them Old Mutual is using its dominant position on the market. Kingdom has since gone on a counter.

Said one Kingdom official: “The decision making space has been contaminated by issues raised by those not in favour of this transaction.”

Old Mutual has however remained unmoved insisting that there was need for more valuation methods. They have however said their doors are still open for negotiations.

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