Econet Rights Issue – Addressing some ‘controversies’
By Alex Gonese
HARARE – Econet Wireless Zimbabwe Limited (“Econet”) shareholders approved a $130million rights issue at an Extraordinary General Meeting held on the 3rd of February 2017. The rights issue will be underwritten by Econet’s controlling shareholder Econet Wireless Global (“EWG”). The build up to the EGM had some ‘controversies’ which I believe need to be explored deeper.
The rights issue will result in foreign direct investment into the country of between $90m and $110m as this was a local debt, which will now be paid off using offshore funds. The bulk of Econet shareholders are foreign and therefore by participating in the rights issue they will be investing in the country. This is not small change especially in an environment where access to international capital markets is difficult to get due to the high political risk placed in the country. The amount that the company intends to raise becomes even more impressive when compared to the $200 million Afreximbank facility that was brokered by the Reserve Bank of Zimbabwe, and the country should be celebrating this huge achievement.
The transaction will also afford the country an opportunity to allocate the meagre foreign currency resources to other critical imports such as drugs, electricity and fuel. The fact that shareholders have the confidence to invest $130m into Econet is a massive vote of confidence in the management team. This is one of biggest capital raise in Southern Africa outside of South Africa. In light of these the benefits to Zimbabwe capital markets cannot be over emphasised.
Some analysts alleged that the rights issue favoured foreign shareholders. Most of these questions flow from the original structure of Econet’s rights issue which called for shareholders wishing to follow their rights to deposit funds in a foreign bank account. This view is myopic to say the least. Most of the foreign shareholders in Econet like other foreign shareholders in other local companies are failing to repatriate declared dividends due to the foreign currency shortages in Zimbabwe. The rights issue structure does not allow these foreign shareholders to use the funds in local banks with repatriation rights to follow their rights. Instead they have to invest new US$ into Econet in order for them to follow their rights.
It must be noted that most of these foreign shareholders have no use of funds in Zimbabwe unlike local shareholders who have use of funds received in Zimbabwe. What this means is that foreign shareholders, EWG included, who are participating in the rights issue have so much confidence in the business that they would rather disregard the fact that they might not enjoy a dividend in the foreseeable future by investing new funds into Econet. The people who will benefit the most will be the local shareholders who will be able to enjoy the dividend as and when it’s declared. How the rights issue then is said to favour foreign shareholders boggles the mind. The fact that the Econet rights issue will bring such significant foreign currency inflows into the country should encourage more companies to actively court foreign shareholders. Now is the time for ZSE listed companies to seek secondary listings in foreign exchanges or in some instances to even switch primary listings in foreign exchanges and have secondary listings on the ZSE.
There have been some calls to localise Econet’s shareholding. When one looks at the amount of capital that has been mobilised by foreign shareholders in Econet, how it has helped Econet o grow into the brand that it is today one can only question the interests of those making that call. Surely the people making such a call only wish for Econet’s demise. It cannot be because they have the interests of local shareholders who can only benefit from the growth of the Econet cake. EWG as a controlling shareholder has helped tremendously to create value in Econet.The Company has declared dividends amounting to $122 million, paid in excess of $1 billion to the government in taxes and licence fees and created about 50,000 jobs since 2010 as a direct result of the profitability of the Company that was induced by the Company’s access to foreign debt. In hindsight it’s possible that some of the structures could have been done differently, however it’s so easy to criticise in hindsight. The fact of the matter is that Econet has grown significantly due to the structures put in place by EWG. It would be better if analysts pointed specific problems and solutions instead of a blanket localisation call which would be detrimental to both Econet and the economy as a whole.
One of the topical issues during the build up to the EGM was the notice from the ZSE Board advising the investing public that it had advised Econet to defer its EGM and issue a supplementary circular. Econet subsequently issued a statement announcing that the ZSE Board had no jurisdiction and the EGM would proceed. Needless to say the EGM proceeding as planned. Analysts have pointed out that this debacle destabilises the market and that there should be consequences. When a company applies for a listing it essentially enters into a contract to abide by the listing rules. The listing rules therefore should govern the relationship between the company and the ZSE. I agree totally with Econet’s assertion that under the listing rules only the ZSE Committee, that is, The Listings Committee has jurisdiction over such matters. The circular to shareholders was approved for publication by that Listings Committee.
The ZSE Board is not listed as a competent authority within the rules and as such had no basis to issue the notice it did. I think even if the notice had been issued by the Listings Committee it would have been defective. A committee can only withdraw its decision in light of new information or change in circumstances. In as far as the Econet issue is concerned no one has alleged that new information came to the attention of the ZSE in the build up to the EGM. Was the ZSE Board notice beneficial to the market, I think it wasn’t. Clearly the notice exposes the ZSE Board to allegations of, at the very least incompetence or worse trying to sabotage Econet. Surely investors expect the Board to be knowledgeable about the listing rules at the minimum. Some analysts and clearly some in the ZSE believed the role of the ZSE is to approve company structures or even advise on transaction structures. This is not the role of the ZSE. ZSE’s role is to look at the fairness of the process and information disclosure, this will enable all shareholders to participate in the decision making process.
In the build up to the EGM it’s reported that the ZSE Board advised Econet that EWG should not vote at the EGM because it was a related party. This was supported by some analysts in the market. It’s not clear from which angle the ZSE Board arrived at this conclusion. One can only speculate that the ZSE Board looked at the fact that EWG was a guarantor to the foreign loans or the fact that EWG was the underwriter to the rights issue. This was one of the strangest issues raised and indeed really raises the issue of ignorance of the rules.
It’s important to note that the rules regarding related party transactions are meant to safeguard minority shareholders from abuse by related parties who normally exert some control or influence in the company in the structuring and approval of transactions which are beneficial only to those related parties. That is why the related parties are normally excluded from voting on resolutions approving such transactions. Section 10 of the listing rules deals extensively with related party rules. It also significantly defines transactions which cannot be deemed related party transactions. Among these is “the transaction is an issue of shares for cash by the listed company pursuant to an opportunity which is made available to holders of the listed company’s securities on the same terms “.
A rights issue is one such classic example. By definition a rights issue, because it is open to all shareholders, cannot be called a related party transaction. In order for a rights issue to succeed it needs the support of the major shareholders. It would be nonsensical to expect a major shareholder to fund an exercise that it didn’t approve. The rules also state that underwriting cannot be termed a related party transaction with the provision that the underwriting fees should not be more than market standard. The reasoning behind this is simple. When a major shareholder underwrites a rights issue it sends positive signal to the other shareholders that the direction the company is going is good. As such it is encouraged that major shareholders underwrite rights offers. Unlike banks or investment funds which will seek to dispose of the shares bought through underwriting shortly after a rights issue which will destabilise the share price, major shareholders normally hold on to the shares.