Econet in controversial $130m rights issue

ECONET Wireless Zimbabwe is planning to raise $130 million through a controversial rights offer and linked debentures in order to service its foreign debt. In a circular released yesterday, Econet said, subject to shareholder and regulatory approval, the group intends to raise $130 million through a rights offer and linked debentures in order to facilitate the servicing of its foreign debt.

Under the proposal, shareholders will follow their rights by paying the subscription price of the shares and linked debentures directly outside Zimbabwe into the company's debt account with Afreximbank.

Econet will offer 1,082,088,944 ordinary shares plus 263 050 614 class A shares at a subscription price of 5 cents for about 82 ordinary shares for every 100 ordinary shares already held in the group.

Each share shall be linked to a redeemable debenture with an issue price of 4,665 cents each, a coupon rate of 5 percent per annum payable upon redemption and a redemption value of 6,252 cents each including cumulative interest for the six year period.

Econet Global Limited, who were the guarantors of the foreign debt which amounts to $128.19 million, will underwrite the transaction. The debt, owed to four international institutions, is due between 2017 and 2019.

An extra-ordinary general meeting to seek consent of the exercise will be held on February 3, while the whole transaction requires exchange control approval from the Reserve Bank of Zimbabwe.

However a lot of grey areas surround the deal as it has emerged that the Zimbabwe Stock Exchange Listings Committee did not approve the circular as required by regulations but instead chief executive Alban Chirume gave the nod ignoring objections from both the committee and the Securities and Exchange Commission of Zimbabwe (SECZ).

The Listings Committee is responsible for the administration of all listings-related matters on the exchange. The committee also includes an official from SECZ and the ZSE CEO.

Well placed sources however told the Herald Business that the Listings Committee and SECZ had raised objections to the proposals on the Econet circular but Mr Chirume gave approval to have it published late Monday.

Concern had been raised over the condition to have minority shareholders pay directly into an offshore account considering that most local shareholders do not have access to nostro dollars given the situation facing Zimbabwean banks. Econet, in the circular, acknowledges that there is critical shortage of foreign currency in nostro accounts of Zimbabwean banks. It said the situation had made it "extremely difficult" for the company and its subsidiaries to service their financial obligations, hence the decision to raise hard currency from members to avoid defaulting.

Independent financial analyst Alex Gonese said that the proposed capital raise was justified as most companies in Zimbabwe are trying to do all they can in order to survive the challenging environment. "It would be catastrophic if Econet were to default."

However the market is of the view that Econet is violating the rights of minority shareholders as they are not being given the chance to defend their shareholding. If shareholders are going to participate then it increases the burden on banks as they are going to demand banks to make Telegraphic Transfers (TTs) to fulfill that transaction.

"If you have no access to nostro dollars, you cannot participate in this rights issue and its very unfair as minority shareholders will end up being diluted as the underwriter will sweep up most of the local shares. It would have been fair if Econet had come up with a structure which accommodates local shareholders. As it is now Econet want to discount a Zimbabwean asset and give it to foreigners," said market analyst Fiona Chigwida.

Econet has over 5000 shareholders but the value of minority shareholders is a small fraction of the rights issue and suggestions have been made that the group comes up with a structure with a local bank that can act as a receiving agent on behalf of Afreximbank so that shareholders are not prejudiced.

Econet Global guaranteed the foreign loans and were being paid fees of 6 percent per annum as such the market, while acknowledging that Econet ( Zimbabwe) is failing to make foreign payments just like everyone else, is of the view that Global is evading its obligation by calling for a rights issue.

"Global is underwriting the rights issues knowing minorities will fail to make foreign payments as per the terms in the circular, that way it gets the shares but at only 5c which is a heavy discount from current market price of 30c. It means Global has been siphoning money from EWZ each year in guarantee fees with no intention of rising to the occasion should default occur," said Miss Chigwida.

There were also concerns on the tradability of debentures and LAs and the group's Class A shares which could easily be converted to ordinary shares.

When asked why he had solely approved the transaction without the knowledge of the Listings Committee, Mr Chirume who has been in past controversies over the way he handled the Meikles suspension issue and the TN delisting, said in any transaction, the listing committee sits down and ask questions to ensure that the circular provides adequate information to shareholders and investors and this was done (in respect to Econet proposed rights offer). He however promised to provide an answer to this publication on what transpired but had not done so at the time of going to print.

Mr Chirume is currently facing domestic violence charges against his wife, in a case he is represented by Beatrice Mtetwa of Mtetwa and Nyambirai. TN Financial Advisors are the lead financial advisors in the transaction.