Zimind Investment: Smoke and mirrors for shareholders

Apple Inc. is sitting on a cash pile of some US$100 million and has come under pressure to return some of that cash to shareholders if it cannot find suitable investments to absorb the cash.

By Special Correspondent

If Apple were to succumb to these pressures, they would have to either pay out a dividend or buy back some of their shares. The benefit of a dividend payment to shareholders is quite straightforward as it would go directly to their bank accounts and they can do what they like with the money.

However, with a share buyback, the position is somewhat complicated in that those shareholders who opt to sell their shares would indeed receive cash for their shares but they would have to give up a certain proportion of their shareholding in the company.

The logic behind a share buyback is that shareholders who do not sell their shares would enhance their shareholding in the company as their percentage ownership of the company would now be based on a smaller number of issued shares. This well understood logic and original justification for share buybacks has been eagerly embraced and adapted by the Zimbabwean market, with some strange results!

Shareholders in Zimbabwe routinely approve share buybacks at AGMs and EGMs because they understand their purported role as a tool for creating shareholder value. Evidence on the ground strongly suggests that they need to think again on this issue and be more circumspect. The reason is simple; share buybacks, as adapted in Zimbabwe, can serve the interests of either all shareholders or some key shareholders or management and therein lies the problem.

It is true that share buybacks by their very nature are designed to reduce the liquidity of the affected shares and this is not such a big issue if there is a meeting of minds among all stakeholders as to what the buyback is meant to achieve. This consensus is not always apparent in Zimbabwe and in time this will become a bone of contention between management and shareholders as the much touted benefits of share buybacks fail to materialise. To put the matter into perspective, one can look at some share buyback programmes that have been undertaken by some companies.

In the two years between October 2010 and September 2012, Powerspeed Electrical bought back 41 million shares at a disclosed total cost of US$123 582. Over the same period, a total of 57 million share options were exercised by management with the ultimate result that the number of issued shares increased from 379 million to 395 million. Overall, the dilutive impact of share options exercised was mitigated by the share buyback programme and that seems to be a pattern for most companies with share buyback programmes.

The point is share buybacks do not necessarily lead to a reduction in liquidity or issued shares if they are undertaken in reaction to or in combination with the issue of share options. The issue is whether the share buyback in this context is meant to benefit shareholders or management.

Another interesting case is that of Econet Wireless Zimbabwe (EWZ). EWZ acquired telecommunications equipment through Econet Wireless Global for a total consideration of US$94 million. Of this amount, US$74 million was paid for in cash through monthly instalments of US$2,2 million over 36 months and the balance was paid for through the issue of 85 million EWZ shares to Econet Wireless Global over 36 months, or 3.5 million shares per month. This would have resulted in Econet Wireless Global tightening its already firm grip on EWZ and at the same time minority shareholders would have felt the dilutive impact of the issue of these shares.

Directly or indirectly, these shares were acquired by EWZ through a share buyback scheme that was sanctioned by shareholders. More shares were acquired under the share buyback programme and they were all retained as treasury shares. EWZ has expended a total of US$61,5 million on share buybacks so far. As at February 2013, there was a balance of 76 million treasury shares after cancellation of 83 million shares and an issue of 25 million shares to acquire 53,6% of TN Bank.

As soon as share buybacks become part of an entangled web involving treasury shares, issuing of additional shares to related parties and use of treasury shares in corporate actions, the further one moves away from the traditional justification of buybacks as vehicles for creating shareholder value. The picture becomes muddled and conflicts of interest emerge. Shareholders need to be convinced that the US$61,5 million spent by EWZ on buybacks has delivered value for them.

Delta Corporation had 1.09 billion issued shares as at March 2009. Since then, the company has issued 40,5 million shares to SAB Miller for a bottling plant and 94,2 million shares have been issued in the exercise of share options by staff and management. So far the company has only bought back 4,5 million of its own shares and the number of issued shares has increased to 1,22 billion. The number of outstanding share options has fallen from 89 million to 34 million as at March 31 2013.

It is a moot point as to whether the company instituted share buybacks as a way to combat the dilutive impact of exercised share options and to reassure a restive market that was becoming increasingly concerned by the aggressive increase in the number of issued shares. Again this demonstrates the potential conflict of interest between shareholders and management.

Given the number of outstanding share options, there can be little worry that buybacks will negatively affect the liquidity of the Delta share in the market by reducing the number of shares in issue. Rather, the issue is whether the buyback programme will be able to cope with shares to be issued in future as these options become exercisable.

The debate on share buybacks has also been complicated by companies that routinely include a resolution for a share buyback programme at AGMs when there is little or no chance of this being effected for lack of the required cash resources.