The difference that six million can make

By Admire Mavolwane



ARISTOTLE, the Greek philosopher, once remarked that “all human actions have one or more of these seven causes: chance, nature, compulsion, habi

t, reason, passion, and desire”.


It is with this in mind that one has to look at the events of the past week. What ‘cause’ could have motivated the different parties to vote they way they did, and what had prodded the movers of the motions that were being deliberated on.


Last week, Tuesday, shareholders of Meikles converged in Harare for an Extraordinary General Meeting (EGM) to consider and if deemed fit — to borrow from the shareholder circular — pass with or without amendments ten resolutions.


The meeting was supposed to have been completed on November 15 but had to be adjourned as one material minority shareholder had expressed reservations on the resolution pertaining to the acquisition of Kingdom.


Experience has shown that in any merger transaction, valuations which are normally of secondary concern to the motivators of the transaction, but primary to minorities, are always an issue.


In order for the promoters of the deal to get it through, they have to pay a premium if the acquirer is the main initiator of the deal. If it is the seller who is screaming to be bought, then a discount would be applied.


As this is not win-win situation, payment of a premium, particularly where scrip is being used as cash, implies that the acquirer undervalues his business and conversely overvalues the targeted entity. On the eve of the publication of the first cautionary statements on the mega-deal which came out on July 31 2007 the market capitalisations of the listed parties to the transactions were Meikles US$207 million; Tanganda, US$29 million; and Kingdom US$80 million.


Kingdom’s peers in the banking sector had much lower market capitalisations with CBZH at US$54 million; FBCH, US$20 million; CFX, US$19 million; ZBFH, US$14 million and NMBZ, US$6 million.


Only Barclays had a higher market capitalisation of US$142 million. This glaring disparity in the valuations seemed to suggest that Kingdom had really run ahead of itself. Thus, the market consensus was that Kingdom was by then overvalued.


Rewinding to the beginning of the year, Meikles had a market capitalisation of US$198 million, Tanganda was worth US$19 million and Kingdom US$8 million. In other words, Kingdom was worth only 4% the value of Meikles. The banking sector market values were CBZH US$38 million; Barclays, US$35 million; FBCH, US$14 million; ZBFH, US$8 million; NMB, US$7 million and CFX, US$6 million.


Back then, the valuation of Kingdom was not out of kilter with that of its peers. It might have been marginally undervalued when compared with FBCH and CBZH but this was not an obtrusive anomaly, some would argue.


The other issue that arose from the transaction was the choice by the advisors, with the concurrence of the board of directors of Meikles, to use only share prices as the basis for coming up with the share swap ratios. The argument advanced was that according to the ‘efficient market hypothesis’ the share price embodies all the information that is in the public domain concerning the companies.


Thus it was decided not to apply other methods used in ascribing intrinsic values to companies. It turned out that this chosen valuation not only undervalued Meikles whose market value had changed by just US$9 million in seven months, but significantly tilted the scale in favour of Kingdom which had notched up US$72 million in same period.


The other view was that Meikles, being a conglomerate, has always traded at a price lower that the sum of its constituent parts. Hence, an intrinsic valuation method would have moderated the impact of the diversification discount.


The voting by poll on the Kingdom resolution was a close 56% in favour and 44% against.


In absolute numbers, out of the 62 million shares that voted, 34 million voted in favour and 28 million against. The difference was just six million shares.


There was no Charles Dempsey so there were no abstentions. However, the parties that had reservations could be faulted for not having lobbied other shareholders.


Neither did they try to sell their point of view to the meeting on the day of the EGM.


On the balance of probabilities, if they had done some talking, they could have won over some shareholders or they could have swayed some shareholders into abstaining.


In such tight contests, it is not those who vote for or against who are crucial, but those who decide not to decide. Ask the Germans. They have the New Zealander to thank for hosting the 2006 Fifa World Cup.


A few days later, the ruling party — by contrast with the ANC of South Africa which calls itself the governing party — unanimously voted by open cry to endorse its presidential candidate for next year’s elections?


Professor Jonathan Moyo once remarked that no wily leader — and may be not Thabo Mbeki — calls for an election that he/she knows will lose.


If this is true then it would mean that the adjournment of the Meikles EGM from November 15 to December 11, after they had smelt the scent of possible defeat, was meant to give the promoters of the merger time to put their ducks in a row. The same could apply to the ruling party leader who, it would be expected, would only call for a congress and let it be conducted in the most opportune manner to maximise his/her chances of success.


So, to which of the seven causes of human action would you ascribe the actions of Meikles shareholders, both for and against the acquisition of Kingdom, the Meikles Board, the ruling party leadership and/or their supporters?

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