More questions for Econet

THE past fortnight has been full of hype on the Econet Wireless Zimbabwe (EWZ) front. In the second week of 2017, the company hiked data tariffs alleging that it was complying with a directive from the Postal and Telecommunications Regulatory Authority of Zimbabwe (POTRAZ).

This was met with a massive outcry from subscribers compelling the Minister for Information, Communication and Technology and Courier Services to reverse the price hike whilst he was on his annual leave.

Over the past week, the giant mobile company was at it again. This time around, the controversy relates to a capital raise in which it is seeking $130 million from its shareholders. The capital raise will comprise a rights issue as well as sell of redeemable debentures.

The group advanced the current gridlock in the banking system to make international payments as the reason for the capital raise.

They indicated that Econet has been failing to service its loans with external financiers.

We commend the company for being proactive as far as looking for solutions on matters affecting company operations.

Instead of sitting back and mourn about problems in the banking system, management has taken the initiative to come up with a solution.

While the Zimbabwe Stock Exchange is still deliberating (and at times disagreeing) on the issue following reports that there was a departure from the normal procedure in the way the circular was given the go-ahead to be published, it is possible that ultimately there would be revisions in the way the transaction is structured.

Particular emphasis will be on conflict of interests when the matter is put to vote.

Will Econet Global and all its related parties vote in the transaction?

Econet Global technically controls the management and board of EWZ. So effectively it is the same entity which signed the loan agreements (2012 announcement was made in London), the same entity now structuring the rights issue and the same entity which negotiated the guarantee.

If all shareholders will be asked to vote at the EGM to be held on February 2017, it would be a mere formality. An analysis of the company’s share register shows that scrip holders amounting to 57 percent are domiciled outside the country while a further 13 percent are held by related parties.

Thus they will be able to rubber stamp the perceived unfair transaction as they will be able to follow their rights.

The underwriter Econet Wireless Global “EWG” will mop up the shares not taken up by shareholders at a highly discounted price of 5 cents, compared to 30 cents when the circular was published. Ideally, ZSE should compel Econet’s conflicted parties not to vote and this should have been included in the circular.

No doubt, the rationale of the transaction is acceptable and should be supported; however, the bone of contention by minority shareholders is that the payment modalities proposed by the company inhibit them from following their rights.

Those wishing to follow their rights will be expected to deposit their funds in Afreximbank account held by Standard Chartered Bank London. This is practically impossible for local shareholders.

As has been suggested before, there was need for an arrangement with a local bank to act as a receiving agent for local shareholders.

That way their rights to participate would not have been violated. In the event that the ZSE fails to push for this disclosure, it would be up to the Reserve Bank’s Exchange Control to ensure that a fair chance is accorded to the few local shareholders.

Furthermore, is there really urgency to pay off the debt completely before maturity?

A schedule provided by the company in the circular shows that only $37,9 million of the borrowed funds are due this year.

The other $90 million is due in 2018 and 2019 with a split of $15,2 million and $75,1 million correspondingly. Was it not ideal for the company to engage lenders and seek relaxed payment terms in light of the challenges obtaining in the local environment?

If the company is true on its intentions, then perhaps the capital raise should have been staggered. This would limit the dilution impact on minorities while waiting for conditions to improve in the economy.

It would be interesting to find out what the conditions of Econet Global’s guarantee agreement were.

What does the agreement say in the event that the guarantee is called up? Maybe there was a condition that states that if the guarantee is called up, Global will get shares at a particular price?

What were the security arrangements on loan and has the group exhausted these . . . shouldn’t shareholders be the last port of call?

On unveiling the syndicated loan back in 2012, management disclosed that EWG, that is presently the major shareholder had acted as a guarantor and was being paid 6 percent per year. Rules in banking state that a guarantor undertakes to pay the lender in the event of the borrower defaulting.

If the agreement says Global should cover the transferability of cash outside, then the risk should be theirs entirely.

In any normal guarantee agreement, Global should replace the lenders by paying the debt but this might not be attractive to them.

It seems they would rather run away from guarantee obligations and have equity at a cheaper rate than debt.

Is it an issue of averting a default or perhaps to trigger an offer to minorities?

We are also of the view that the debentures should be listed on the ZSE to make them freely tradable. The condition that trades will only be approved by trustees will create a loophole in that select buyers can mop anything that will be up for sale.

The need to have proper KYC proffered by the company does not hold water as brokers and transfer secretaries have always performed this role.

Econet transactions are always mired in controversy each time the major shareholder, EWG, is involved.

Another transaction that comes to mind is that of 2009 when EWG was providing network expansion equipment to Econet Wireless Zimbabwe.

Some shareholders were against the transaction as they were of the view that the equipment that was being supplied by EWG was overpriced.

The deal eventually sailed through amid allegations of rigging on the ballot on part of the company and auditors involved.

This current controversial transaction appears to be a way of declaring a dividend to EWG at a time when telecom companies’ operations are under siege. — Wires