Corporate Deals That Never Materialise

EVER since the deregulation of the economy which renewed investor interest in Zimbabwe rumours of corporate deals involving foreigners have abounded.

This is because most local companies are in dire need of fresh capital injections. Huge amounts running into several millions of US dollars are required for working capital and also to repair plant and machinery.  Domestic investors do not have the required money and resultantly companies are turning to foreigners for capital.

Lately the country has hosted numerous gatherings showcasing investment opportunities and interest has been exceptional.

 

Some of the attendees have come back into the country to scout for investment opportunities. Meetings have been held between the prospective participants and representatives of local companies to explore ways of cooperation.

 

Still with all this hype few deals, if any, have been sealed yet. Some negotiations were aborted at embryonic stages whiles others have turned out to be nothing more than unfounded rumours.

Many expected that by now several transactions would have materialised, a scenario that could have seen liquidity improving enormously. That has not happened and the liquidity situation is worsening. While some companies have begun to record brisk business for many sales are still depressed and cash flows are low.

Credit lines, which were largely expected to facilitate an inflow of huge quantities of money, have not been coming. This has left companies with little option but to turn to local banks for working capital.

Unfortunately, few financial institutions are capable of providing the required funding on favourable terms.

 

Most of the available loans carry prohibitive interest rates above 25% per year and are also short term-below 90 days. In contrast, firms require long-term finance of at least six months. Some of the companies which borrowed at these high rates are failing to settle because they are not generating enough revenues.

 

As a result companies are being compelled to invite foreigners to inject capital in return for equity.

Several listed companies are currently working on capital raising initiatives.

 

For instance, NicozDiamond, Fidelity Life and CFX are preparing for private placements to new investors and rights offers to existing shareholders.

 

Delta is finalising the disposal of its shareholding in Ariston. OK had been negotiating with Shoprite until the talks broke down a few weeks ago. RioZim shareholders recently approved a private placement whilst Bindura’s parent company, Mwana Africa, is said to be talking to prospective investors interested in involvement in the nickel business.

Besides quoted companies, unlisted firms and parastatals are also courting foreigners for capital injections.

 

Some banks are negotiating with outside financiers for funds to meet minimum capital requirements and to on-lend to clients. Among state enterprises looking for funds are Ziscosteel, Arda, NRZ, Hwange Colliery and Zesa. So far, only Arda has successfully partnered with a well-known private local investor to resuscitate farming at Middle Sabi and Chisumbanje Estates.

For other institutions the discussions have stretched for longer periods before collapsing at different stages. One such example was the OK-Shoprite talks.

 

A fortnight ago Shoprite announced that it was abandoning its planned acquisition of shareholding in OK, conveniently citing worsening socio-political environment. Ironically, Shoprite had appeared to be apathetic to the threats to investments posed by the specification of KML.

 

The retail giant then vowed to continue with the negotiations even though observers questioned the rationale given that a major investor in Zimbabwe had his property rights stripped away by the specification. Shoprite planned on acquiring a controlling stake in OK through injecting R167 million. This injection would have gone a long way in addressing the working capital needs of OK.

It would appear that deals are collapsing mainly because of three reasons: price; control; and regulatory bottlenecks. Foreigners come into Zimbabwe expecting to buy heavily discounted assets. From outside, Zimbabwe is a rundown country where locals are desperate to sell.

 

When foreigners come in, they are surprised to learn of locals demanding very high prices. After holding on for more than a decade, locals are reluctant to discount assets at this critical point. Simultaneously, foreigners are loathe to pay a premium on Zimbabwe assets considering the high country risk and the rundown and antiquated state of many firms’ equipment. This inevitably results in stalemate and collapse of discussions.

 

In the few cases where the buyer and seller agree on the price, the next hurdle is usually the size of the shareholding sought by the potential investor. Most local companies are owner managed. Although the owners are looking for money they still want to maintain ownership and control. The foreigners on the other hand want controlling stakes and insist on bringing in their own people after taking over.

Governments are usually hesitant to give away control to foreigners in companies perceived as strategic.

 

Several regulatory hurdles are put in place to protect local companies from being taken over by foreigners. For example, tight regulations in both India and South Africa are blamed for scuttling the proposed cross shareholding deal between telecoms giants MTN and Bharti.

The two companies are considered strategic in their countries and both governments were not keen to allow foreign shareholding. Back home the government, although desperate for money, is evidently uncomfortable in selling its assets.

 

This is however unreasonable because the companies need funding which the government cannot provide. Moreover, most parastatals are unprofitable and a drain on the fiscus.

 

Ranga Makwata/Kumbirai Makwembere

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