HomeLocal NewsCottco: Can name-change herald better days ahead?

Cottco: Can name-change herald better days ahead?

It appears listed companies are resorting to name-changes as a way of heralding a change in business strategy and culture. Some companies even go to the extent of drafting a new mission statement.

Report by Victor Makanda

Prior to dollarisation, a number of companies resorted to name-changes. Finhold became ZB Financial Holdings, Zimsun changed to African Sun while the duo of Zimbabwe Sugar Refineries and First Mutual Limited went on to become starafrica corporation and Afre Corporation, respectively.

However, it appears other companies are reverting to their old names. A recent case being that of Afre Corporation reverting to its former name First Mutual Holdings after approval by shareholders at an extraordinary general meeting (EGM) on June 4 2013.

Last week, Aico Africa Limited published a circular which finally put to an end the speculation on whether unbundling would take place for the conglomerate.
Surely, unbundling will be taking place upon approval by shareholders at an EGM tabled for December 18 2013. The unbundling has seven resolutions: the first being the waiver of pre-emptive rights by Aico in respect of the proposed issue of new shares by Seed Co to Vilmorin & Cie.

It also involves a partial sale of the company’s Seed Co shares amounting 30,82 million and warehousing of the company’s 49% stake in Olivine Holdings within a trust pending disposal. A rights issue worth US$15,1 million, disposal of non-core assets with an estimated market value of US$9,9 million and a dividend-in-specie to shareholders of the 66,76 million remaining Seed Co shares, are the other resolutions.

Finally, there is a proposal for a name-change from Aico Africa Limited to Cottco Holdings Limited. Will the name change and the other funding measures by Aico see Cottco returning to winning ways or are they just fruitless efforts which may see the ongoing woes persisting under the new old name?

The move by Aico to unbundle, however, is a step in the right direction as the group has officially come to terms with the view that critics have always had of an ending to the marriage. In its circular, the Aico board finally accepted the fact that their Olivine investment was not adding value to the group, but rather making losses. They also acknowledged that value was now being destroyed especially in their most valuable asset, Seed Co, where they stand to lose shares worth US$88,5 million which they had pledged as security borrowings for Cottco and Olivine. It is against this background that the directors are seeking to unbundle so that all the units can operate separately.

While acknowledging the intended positive move through the unbundling, Cottco’s woes may be far from over. This is so because Cottco has a huge debt requirement. Their legacy debt alone is estimated at US$35 million while other working capital-related debt as at March 2013 was US$37 million for the cotton business alone. Against such a scenario, the proposed US$38,36 million repayment may not lead to positive results for Cottco.

In addition, the intended US$15,1 million rights offer may not be fully subscribed for two key reasons. Firstly, the low confidence that market participants hold on the Aico shares may result in a low uptake of the rights offer despite the 58% discount on the table. The rights offer subscription price of 2,7 US cents is much lower compared with the current market price of 6,5 US cents.

Furthermore, liquidity conditions have remained tight and such a scenario may not lead to investors following their rights especially for a loss-making, debt-trapped company such as Aico. The underwriter, NMB Bank, is likely to end up taking more of the shares as no rational investor would take up the stock in the current set-up.
The disposal of non-core assets may also not yield the intended benefits which may also derail the fundraising initiatives by Cottco. For starters, of the estimated US$9,9 million in assets, US$4,5 million is expected. However, considering the above-mentioned tight liquidity conditions, even the latter amount may be difficult to realise. Assuming a buyer is found, the actual realisation of these funds may also take longer than expected. Listed companies PG and starafrica, among others, have also tried to dispose of non-core assets, but the process has taken longer than expected due to illiquidity.

To sum it up, executives should take note of the fact that a name-change alone will not see a loss-making company returning to profitability. In its September 2013 financial results, Cottco’s market share dropped to 24% from 42% meaning competitors are increasing their grip in the sector by riding on challenges being faced by the company. Thus, there is need for a complete overhaul of the business, including board changes.

In Cottco’s case, this will be taking place as the managing director David Machingaidze, is reported to have resigned while Pat Devenish and B Mudzimuirema will resign from Cottco’s board pending finalisation of the unbundling transaction. Only time will tell whether Cottco will recover after the transaction while Olivine could remain in the doldrums due to intense import competition. For Seed Co, however, this might be the turning point required for it to soar to greater heights as a stand-alone business.

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