Following the adoption of multi currencies in the economy in early 2009, a few reverse listings have been witnessed, such as that of Interfin Bank from CFX and the spinning off of Padenga and TN Bank by Innscor and TN Holdings respectively.
Report by Victor Makanda
The year 2013 has however started on a poor note as the former TN Holdings stable (now Lifestyle Holdings) slowly transforms its operations from being a publicly–owned to a privately-owned company.
This follows TN Bank’s delisting from the local bourse on February 8, 2013. Lifestyle Holdings is also seeking shareholder approval which will ultimately lead to its de-listing.
Without getting deeper into the reasons for delisting, the proposals leave one querying the future of the bourse when such events occur in the early part of the year. Worse still, does it instill investor confidence, or rather, is it a sign that confidence in the local bourse is waning?
The recent Lifestyle Holdings scheme of arrangement published on February 18, barely five days after TN Bank was delisted, poses a key question for the minds of the corporate world.
Could this be the end of the TN Holdings era? The proposed scheme involves the offer to issue one TN Harlequin Luxaire International Limited (TNHLI) ordinary share in exchange for every 235.12 Lifestyle ordinary shares held.
An alternative cash consideration of US$0.00645 for every Lifestyle ordinary share held, payable in four equal instalments after every 90-days, is also being offered.
Upon approval of the scheme at a meeting of shareholders and the High Court, Lifestyle Holdings will finally call it a day on the local bourse. The company was reverse-listed into the then Tedco on January 4, 2010.
Lifestyle’s scheme of arrangement leaves a lot to be desired with regard to its mechanics and rationale. To begin with, the cash conversion price of US 0.645cents, which compares favourably to the last trading price of US0.4c, is at a significant 61,25% premium.
Concern, however, relates to the payment spread over four equal instalments to be made after every 90-days. Such a relatively long horizon could somehow prejudice minority shareholders, defeating the whole purpose of offering a premium, while also signalling likely liquidity challenges at the company.
In addition, the rationale for having the proposed scheme meeting does not make sense, especially for resolving the sovereign risk issue.
It reflects the company’s fruitless efforts to raise finance from international investors to facilitate its operations after failing to secure funds in the local market.
International investors have been citing high sovereign risk as the major hindrance, hence the incorporation of TNHLI in Mauritius on December 19, 2012 to manage or reduce the risk.
However, case studies of companies that have been incorporated as far away as the Cayman Islands in the case of Cambria (formerly LonZim) and Jersey in the case of Masawara, show that they have still failed.
The major issue is that capital usually follows viable business models.
A case in mind is Delta, which despite the highly perceived country risk has received a cumulative US$200 million invested by its foreign shareholders since dollarisation. Cambria Plc’s incorporation in the Cayman Islands and listing on the London Alternative Investment Market has meant to facilitate funding but nonetheless failed.
The major hindrance was their business model, which most investors felt was not viable and was also unclear. Investors regard Cambria as a collection of assets as also is the case with the Lifestyle stable.
Since its listing in 2010, the conglomerate grew in leaps and bounds through an aggressive acquisition policy which saw financial services, medical aid, furniture, livestock banking, supermarkets and fast foods being housed collectively. What was worrying from day one was the lack of synergies in the conglomerate.
Management went to great pains to explain the business model but market analysts just failed to understand it. One would have assumed lessons would have been learnt from the falling out of favour of conglomerates such as Star Africa and Art to name just a few.
However, as time passed and regulatory and economic changes took place, especially in 2012, the banking arm, the flagship of the group, was stripped from the conglomerate through the Econet takeover.
In the furniture retailing arm, high default rates and tight liquidity saw the business failing to flourish.
Intense competition in the fast foods and supermarkets space has seen the company playing second fiddle to market leader Innscor, a scenario likely to persist in the future. The acquisition by Lifestyle of Pelham’s was not well received by the market as it was controversial and also because the company was not performing.
Overall, the major reason for the struggles of Lifestyle Holdings, aside from the lack of synergies, was that the group utilised bank deposits to finance credit sales by the furniture business.
They sold aggressively and failed to collect the cash, which created a liquidity shortage. To circumvent the cash problem they ventured into the fast foods and supermarkets space as they considered these cash rich.
But they failed to realise that profitability was a prerequisite and they also underestimated the intense competition in the respective sectors. The lack of competitive edge ultimately worsened their profitability and viability position.
Another drawback of incorporating a company elsewhere, in this case Mauritius, is that it does not change the fact that operations are centered in Zimbabwe. We believe the sovereign risk factor will always be present and might not bring the results expected, especially when the new business model is under pressure in all the sectors it operates, ie, furniture retailing and fast foods.
Even with the new business model, market players still feel it is too vague. Overall, the search for accessible offshore funding is likely to remain a mammoth task for TNHLI, especially when there are barely any operations across the country’s borders, particularly from sane investors.
The hard truth is expressed in what Warren Buffet once said; “it is only when the tide goes down that you learn who’s been swimming naked.”
Events on the local bourse are slowly separating the boys from the men and we are likely to see an unkind cleansing process on the bourse as capital constraints intensify.