Econet shareholders lose $100 million in 10 days

Econet Wireless Zimbabwe stockholders have lost over $100 million in shareholder value in 10 days due to selling pressure ahead of a capital raising initiative which is set to dilute minorities.

Econet shareholders are set to meet on February 3 to approve a $130 million rights issue meant to raise money to pay foreign obligations, which the company has failed to do due to critical shortages of foreign currency in the overseas nostro accounts of Zimbabwe's banks.

According to statistics from the Zimbabwe Stock Exchange, Econet's market capitalisation was down to $163 677 319 as of Friday from $272 795 532 on January 17 — the day the company announced plans to raise $130 million from existing shareholders. This means that $109 118 213 in shareholder value was lost in 10 days.

The share price had tanked by 40% to 18 cents on Friday from 30 cents on January 17.

Analysts say the decline in the shares was due to selling pressure following the circular on the rights offer.

Financial research firm, Equity Axis, said the drop in the share price was a result of minorities discounting for the dilution.

"In the event that one fails to participate, which of course will be by Econet's default, one will be subjected to a 54% dilution. In essence, one should be at comfort foregoing Econet shares at any price above 13 cents as the excess represents a premium given the post rights issue matrix," it said.

In terms of the rights offer, shareholders shall be offered, pro rata to their shareholdings, 1 082 088 944 ordinary shares plus 263 050 614 Class A shares at a subscription price of 5 cents each on the basis of circa 82 ordinary shares for every 100 shares already held.

Under the terms of the offer, members have to follow their rights by paying the subscription price of the shares and linked debentures in United States dollars directly outside Zimbabwe into the company's debt service account with Afreximbank.

Analysts say this mode of payment leaves minorities in a lurch as they cannot pay for additional shares.

"In more abstract terms, Econet is calling for unorthodox means of payment which is tantamount to externalisation as normal payments expressed via telegraphic transfers are regulated by the central bank. Therefore, as a given, these payments are subjected to gridlocks due to the liquidity crisis and will in all likelihood fail to settle or take a lengthier period outside of the rights issue dates to settle," the research firm said.

It said institutional investors, despite having the cash, are not permitted to invest offshore and required a waiver from the central bank.

"If the waiver can be granted, it therefore means RBZ should clear Econet directly and avoid the capital raise," it said.

Equity Axis said while the rights issue price was attractive and heavily discounted, it suited the underwriter who would take all unsubscribed shares when locals fail to participate in the exercise.