Acquisitions and the case of Zimplow

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In international markets, corporate actions such as mergers and acquisitions are an important indicator of the performance of the economy. If a company makes an acquisition, it is viewed positively by market watchers as a sign of confidence in the prospects of the economy going forward.

Kumbirai Makwembere

Markets in turn rally as they are cheered by such a development. Share prices of the respective companies also rally as investors buy the stock so as to benefit from anticipated improved company earnings. An example that readily comes to mind are the gains recorded on the Dow Jones after Warren Buffet announced that Berkshire Hathaway was buying a stake in Heinz.

Unfortunately, the same cannot be said for the acquisition of Tractive Power Holdings (TPH) by Zimplow Holdings. Since Zimplow announced that it was acquiring TPH, the company’s share price has weakened from 7,5 US cents on June 19 2012, hitting a low of 2,5 US cents on the February 22 this year when the company published a profit warning, before the enlarged group listed at 4,5 US cents. The new Zimplow subsequently published results to December 31 2012 incorporating the six-month performance of the newly acquired TPH. Financials showed a loss attributable to shareholders of US$812 754 compared to a profit of US$2,7 million in the prior year. This again was the first time that Zimplow recorded a loss since the adoption of multiple currencies.

Management attributed the decline in performance to the poor 2011/2012 farming season together with the cotton price wars between merchants and farmers early last year.

Furthermore, rains in the 2012/2013 farming season were both late and erratic and all this resulted in local implements’ sales declining by 28%. The decline was partially absorbed by a 13% growth in exports of implements. However, sales in the region were characterised by low margins due to competition from other players as Japan, China and India.

Results were also dragged down by restructuring costs of US$1,9 million together with a high interest bill of US$1 million that was 1 196% above that incurred in 2011. Company borrowings, all taken over from TPH, stood at US$5,85 million with approximately 50% of these coming from Puzey and Payne alone.

The acquisition of TPH will undoubtedly strengthen Zimplow’s earnings potential.

In the period under review, revenues jumped by 130% and management attributed the growth to the acquisition of TPH. Bringing on board Barzem and Farmec will help diversify the company’s income streams. The former, a supplier of earth moving and mining equipment, will help consolidate the company’s footprint in the mining sector, which was previously serviced by Tassburg and CT Bolts through the supply of nails, nuts, rivets and screws.

In addition, there are a number of infrastructure development projects that are due to take place in the economy and these should benefit Barzem if they materialise.

Farmec will broaden the product offering to the agricultural sector to include tractors and combine harvesters, thereby complementing the animal-drawn implements already offered by Mealie Brand.

Presently, Farmec numbers are solid riding on generator sales and repairs. Previously, TPH was not performing to its full potential as the major shareholder then, FinTrust, was viewed as passive by the market.

Zimplow restructured its operations into four clusters, namely mining, agriculture, property and motoring. The latter will house CT Bolts, Barzem and Northmec while the agricultural division will comprise the Mealie Brand, Farmec and Afritrac.

Manica Properties makes up the properties unit and likewise Puzey and Payne makes up the motoring unit. What is important however is to ensure that the growth in top line is also felt at the bottom line level. This therefore entails streamlining operations to ensure there is no duplication of roles and processes among operating units.

Zimplow’s focus is on agriculture and mining, hence Puzey and Payne should be disposed of as it is now a misfit. Market preferences over the years have shifted from sedans to double cab trucks which their mainstream brand Peugeot does not offer. The company is again struggling to match competition from firms like Croco Motors.

Furthermore, vehicle finance remains tight in the economy and this has seen individuals opting for grey imports to brand new vehicles. Resultantly, vehicle sales and parts over the period were down 20% and 23% respectively. Workshop labour hours also declined by 8%. There is again a need to sell off the property portfolio which the company is sitting on to pay off the short-term expensive debt.

Management should go a step further to ensure the market buys into the new Zimplow strategy. The assets in the group have strong earnings potential. What is now needed is a clear-cut strategy on how operations within the various units will be integrated so that they operate at optimum levels for the benefit of shareholders.

In the short-term, performance will be dragged down by restructuring expenses. Moreover, the company has to bear the costs of buying out TPH minorities of approximately US$3,4 million. The restructuring costs are nonetheless once off and 75% of them were incurred in the past financial year. The new Zimplow has a compelling growth story as it stands to benefit as mining and agriculture are the two sectors anticipated to spearhead economic growth.

There is value for long-term investors in Zimplow as management indicated that revenues might reach US$100 million in 2015 from the current US$36 million.

Agriculture and mining sectors have both exhibited strong growth since dollarisation and still they remain far below the peaks achieved in the mid-1990s.

However, these sectors are greatly underfunded at the moment. Inflows of capital into the resource sector have slowed due to the ongoing implementation of Indigenisation and Economic Empowerment regulations.

On the agricultural front, there is a need to finalise issues of land tenure so that land can be used as an asset in securing finance from banking institutions.

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