IDC under Attack
Agriculture, Strategy, Zambeef Products Plc

It has been an interesting start to the year 2018 for the custodians of all parastatals. IDC closed 2017 with a $15m purchase of ZAMPALM. While the ink was still drying following this acquisition, we learned through zambia24.com that their CEO Mateyo Kaluba (MK) had announced to a Parliamentary Committee on Parastatal Bodies chaired by Msanzala Member of Parliament Peter Daka in Lusaka that they were in talks with Superior Milling to purchase 76% shares of the second best milling company in Zambia.

During his address to the committee a question was raised by Hon. Douglas Siakalima as to why IDC was buying a company that was loss making. CEO MK was quoted responding that “Superior Milling has challenges with working capital. Part of the mandate given to us was to ensure we were in strategic industries and milling is that industry so we looked for a brand which is well-recognized and whose extent was something we could handle without too much funding. He further said that “Our intention is to acquire 76 per cent shares, the management has agreed to that, this will help ensure food security in the country”.

The rationale or investment hypothesis for buying Superior Millings is that it is one of Zambia’s most recognized maize meal brands. You will recall from accounting that Brands represent Goodwill which is a line item that is recognized on the balance sheet. Furthermore, IDC are making a strategic acquisition to ensure that they are well placed in strategic industries such as Milling.

However, what followed was a scathing attack on MK’s IDC by Zambia Institute for Policy Analysis and Research (ZIPAR) whose Executive Director Dr Pamela Kabaso stated that there is currently a lot of confusion about the IDC’s broader mandate and precisely how it is supposed to intervene in the industry or what businesses its meant to fund. She further demanded that the organization clearly outline the criteria under which IDC made its investment decisions and what the exit strategy was for all such undertakings. Short of school MK on corporate finance, she also touched on IDCs staffing level and doubted their adequacy in terms of capacity to execute these deals. Dr Kabase also expressed concern over corporate governance issues such as IDC’s current reporting structure as well as span of its mandate and her organization had observed overlaps between IDC and Zambia Development Agency (ZDA).

Upon reviewing the concerns raised by ZIPAR, Financial insight did some due diligence of its own. According to their website, IDCs mandate has prioritized the following sectors (with a figure for the number of jobs they wish to create)

  • Agriculture (550,000 jobs)
  • Tourism (300,000 jobs)
  • Infrastructure (85, 000 jobs)
  • Manufacturing (89, 000 jobs)

So far all the purchases that have been announced by MK have been in the aforementioned priority sectors. For example, the ZAMPLAM acquisition from ZAMBEEF is in Agriculture. The Superior Milling acquisition is also in Agriculture. Scaling Solar is in the Manufacturing sector.

Further review of IDCs investment focus (IF) indicates that the activities they are involved in include:

  • Project development
  • Provision of development finance
  • Non-financial project support and industry knowledge
  • Fund management
  • Industrial policy research
  • Sector studies
  • Facilitation and support

In addition, the IF also points out at what stage in the investment cycle IDC participates in which include:

  • Conceptual
  • Pre-feasibility
  • Feasibility
  • Business setup
  • Expansion
  • Mature & exits

Financial Insight has established that an opportunity was lost by ZIPAR to question the bold numbers that IDC has ambitions for. Furthermore, if they had scrutinized the deals such as ZAMPLAM which we had stated was in business setup stage as revenue was yet to be realized and the small matter of the reserve capacity that the acquisition possessed, maybe the question to MK’s legion of Investment Analysts was going to be “How do you make the most to exploit the reserve capacity that the ZAMPLAM deal presents?”.

Upon further investigation, we discovered that ZAMPALM’s first crushing mill (2 tons/hr) was established in 2016.  Explains why there have been no sales recorded in the 2016 Zambeef Annual Report. Furthermore, according to IDC, their intention is to plant a total of 3,764 Ha and construct a second (2 tons/hr) crushing mill in 2018, and an additional 10 tons/hr mill to be established in 2020. The investment case is clear. This investment could potentially turn the edible oil industry in Zambia on its head.

In the case of Superior Milling, what we noted was MK’s statement regarding challenges in working capital. This was indicative of a business that is in between expansion and maturity therefore the question to MK’s Investment Analysts would be “What is the turnaround strategy that will be put in place to ensure that value creation is protected”.

Strains on working capital mean that a business hemorrhaging cash. There are a few options to take when such happens. It often requires that a complete audit of the company’s business processes are identified. Here after, from an operations management perspective, the leaks are identified and plugged. Usually turnarounds will also suggest restructuring of staff. Some companies have been known to down size. Others consider looking at their human capital and getting the most out of each employee (options include balanced score card). This can be a lengthy process and we business the Business Development Team at IDC has serious considered this before giving the OK for the purchase.

 

FACT FILE: WHO ARE IDC

 

The Industrial Development Corporation Limited (“IDC”) was incorporated in February 2014 and is wholly owned by the Minister of Finance under the Minister of Finance (Incorporation) Act Cap 349 of the Laws of Zambia. The IDC serves as an investments holding company for state owned enterprises incorporated under the Companies Act and investments under the Banking and Financial Services Act. In addition, the IDC acts as a frontier investor in starting new enterprises with the private sector or acting as catalyst for capital formation and job creation.

The primary role and objective of the IDC is to serve as a vehicle to spearhead and stimulate economic development and growth, through industrialization in particular, for wealth and job creation in Zambia for the benefit of the citizenry.

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