WRITING about the rite of rights offers should ordinarily be staid; rights offer is run-of-the-mill business. It is turning into a ping-pong match between Econet and the regulators.
THE BRETT CHULU COLUMN
The public spat is a side show. Fear of Econet Global, Econet’s parent, losing a good credit rating and a possible loss of control of Econet seems to be the main concern explaining the dynamics of Econet’s rights offer.
When a company takes treasury or unissued shares and offers them to existing shareholders in proportion to existing levels of shareholding for shareholders to buy; we call that a rights offer.
Undoubtedly, the failure of Econet’s foreign investors to repatriate their dividends owing to Zimbabwe’s low foreign currency levels and external payments hold-up raised the risk of a credit rating downgrade of both Econet and Econet Global. External payments gridlock served to indicate that Econet Global could fail to honour instalments on the balance of the US$128 million syndicated loan owed to four international financiers (Asian Development Bank, Ericsson Credit AB, African Export-Import Bank (Afreximbank) and the Industrial Development Corporation).
These international lenders charged interest of between 5,7% and 9%. The relatively reasonable interest rates correspond to a very good credit rating; an impressive A-rating (low credit risk) on the Standard & Poor’s (S&P)’s credit ratings scale. That means Econet Global’s credit rating is roughly similar to S&P’s sovereign credit rating for Botswana.
Econet Global had to do something nippily in order to protect its good credit rating. Econet Global could have reasoned that an external payments logjam would soon render Econet unable to wire the 6% guarantee fees to it. This guarantee is for the syndicated loan sourced by Econet Global on behalf of Econet.
This is possibly why Econet initially insisted that payments for the rights offer and debentures (unsecured loans from existing shareholders) be wired straight into Afreximbank’s London Standard Chartered account.
Undoubtedly, this was calculated to give a clear signal that Econet could not divert the funds raised since proceeds of the fundraising exercise would be deposited straight into the lead arranger’s account.
Econet’s new proposal that local investors can make their payments into its Steward Bank account, with Econet Global remitting the equivalent amounts to Afreximbank’s London account, is a variation of the initial thinking. The biggest factor here is that the Zimbabwean risk factor is threatening not just Econet, but its parent company.
Failure to deal decisively with the risk could find Econet Global either being charged very high interest rates for any new loans or completely denied funding. A bad word from lenders is the equivalent of the Old Testament priest pronouncing you unclean (a code word for leprosy).
The fear of the high priests of finance pronouncing Econet Global a financial leper, soiling its hard-won good credit rating, forced Econet Global to consider a mixed fundraising scheme of rights offer and debentures to clear the five loans arranged by Afreximbank.
In their calculation, Econet Global would have reasoned that the financial risk in Zimbabwe signposted by importers failing to process external payments would persist for a while long enough to threaten its capacity to pay the coupon (interest payment) on the syndicated loan arranged by Afreximbank.
If Econet had insisted on just raising funds through a rights offer, it would have encountered a serious problem — it does not have enough unissued shares to offer at a bargain of 5 US cents a share. At 5 cents a share, Econet would have raised a maximum of US$68 million or just 53% of the required loan balance. After the rights offer issued shares will stand at 2 985 154 148, that is, 99,5% of the authorised shares.
The riddle Econet had to solve was how to make the rights offer as attractive as possible to shareholders given the limited number of its unused treasury treasures. It could have raised the US$128 million by releasing all its 1 359 985 410 unissued shares at 11 cents a share.
Probably that was considered too steep a price for the underwriter and other existing shareholders’ wallets, more so that external shareholders are currently struggling to repatriate their dividends.
A heavy discount of 83% (at the time the offer became public) was settled for. Since Econet cannot offer shares beyond the authorised three billion, it had no option but to consider supplementing with debentures to hit the US$128 million bull’s eye.
Risk of loss of control of Econet by Econet Global in a rights offer of this magnitude is very real.
When you consider a rights offer of a scale that leaves a measly 0,5% shares unissued, you would be a fool as the majority shareholder not to consider measures that protect you from losing control of the company you founded. For Econet Global, the 30,2% majority shareholder in Econet, using its influence at board level to have the rights offer take the underwriting option (backstop commitment), would have been a no-brainer.
It is very likely that the fear of losing control drove Econet Global to insert itself as the underwriter to pick up any shares not taken up by other shareholders. It explains why the shares were massively discounted to enable the underwriter to buy these without having to break the bank.
It also sheds light into why a clause was inserted to the effect that Econet Global, the underwriter, could elect to either offer minorities the shares it mops up or not. In this construction, Econet Global can then control what happens with the shares it will mop up. It can calibrate the shareholding level it desires.
Econet Global could not afford to put its fate in the hands of either an independent underwriter or a process of re-allocating mopped up shares it could not control.
We know from studies of organisations facing a threat to their core interests that they react by limiting decisions to a few influential leaders. It is very evident that the decision to appoint the largest shareholder to be the underwriter was heavily influenced by the majority shareholder.
We also know from science that when economic agents are bent on optimising their personal economic interests, they become very sensitive to the smallest of opportunities and risks to either defend existing levels of personal economic gain or enhance them.
The argument about Zimbabwe Stock Exchange rules unburdening Econet Global from being a related party is really about grabbing every advantage at Econet Global’s disposal to sanitise and legitimate its self-proclamation as the underwriter. So Econet Global can be the referee, match official and player — all at once — all legit, no questions, thanks to stock exchange rules.
So Econet Global, if need be, can use its US$2,6 million underwriting fees to bail out any of its unrelated “related” parties. It is all about avoiding voluntarily handing a loaded gun to a robber to rob you. Pure fear.
I am hoping that I am right about the rite of rights offer riding on fright.
Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal.