ZCCM IH Mandatory Offer – Case of the ‘lonely’ underwriter
Investrust Bank Plc, ZCCM-Investment Holdings Plc

It all started with a right offer. Investrust bank needed to raise money. Debt or Equity are usually the choices that premier companies have when it comes to raising finance for whatever reason. The bank chose the latter which involved issue of rights to its existing shareholders that would enable them to buy additional shares directly from the bank in proportion to their existing holdings, within a fixed time period.

According to the ZCCM website, this resulted in ZCCM-IH’s shareholding in Investrust to increase from 10% to 48.6%. “As a result, ZCCM-IH was required to proceed with a Mandatory Offer to all the other shareholders in Investrust in accordance with Rule 56 of the Third Schedule of the Securities (Takeovers and Mergers) Rules, Statutory Instrument No 170 of 1993, (the “Takeovers Rules”), issued pursuant to the Securities Act, Chapter 354 of the Laws of Zambia (the “Securities Act”).”

In light of the Mandatory Offer requirement, ZCCM opted to sell down its shareholding to 35% hence they requested for a waiver from the Securities and Exchange Commission (which was subsequently granted). They were granted exactly one year (from 21 October 2016) to achieve this sell down. In rational time, one would argue that that was more than enough time for ZCCM to make its case to investors to buy its “surplus” shares of the bank. However, they only managed to sell 3.2% and ZCCM-IH thus currently has a shareholding of 45.4% in the Bank.

This is not the first time that a fund raising mechanism has flopped in the rights issue or rights offer world. According to the UK’s Guardian paper, HBOS (a mortgage provider) suffered a similar fate. The uptake was so bad that it took the underwriters Morgan Stanley and Dresdner Kleinwort to come in and mop up all the new shares.

There are several reasons why shareholders shun such corporate actions. On the main, according to Tanya Jefferies, shareholders don’t like rights issues. Tanya believes that “any company that gives its investors the unwelcome choice between stumping up more cash or seeing their existing holding diluted can expect to take a significant hit to its stock”. This is the reason why certain types of investors would shun the issue of additional shares especially if it goes against their investment hypothesis.

Going forward, minority shareholders now have the preposition of a Mandatory offer for their shares at an offer price of ZMW 12.00 per share. According to the Mandatory offer documentation published by Stockbrokers Zambia, the Offer Price is approximately a 4.9% premium to the ZMW 11.44 Rights Offer Price which was the price at which ZCCM-IH acquired its majority interest in Investrust by undertaking to subscribe for all Ordinary Shares not subscribed for by other shareholders during the Rights Offer in February 2016. The hard choice for minorities is to accept an offer that is less than the current share price of ZMW 13.50. For every share sold, a shareholder will be losing 12.5% in value.

The shareholders dilemma will be to hold and hope with the takeover by ZCCM IH will spell the beginning of the turnaround for the bank that has had negative earnings 3 years in a row or to sell at a 12.5% discount of the current share price that has been unmoved for many months. The decision to either sell or hold the stock will depend largely on what type of investor one is. For those with a long term view, an internal study of the company may be required to assess whether there is a foreseeable growth in equity over the long term. Investors with a short term view may, opt out and hunt for stock that is currently performing better at a good price.

Conversely, shareholders may also want to base their decision on whether or not the MO was a fair and reasonable one. PWC were called in to be independent financial advisors for the MO and they used a range of methods for valuing the stock price that included: Market approach, Net assets approach and an Income-based approach with three key value drivers that included Investrust’s business model, their historical share trading prices and the liquidity of the LuSE. They concluded that a reasonable and fair value for the share would range from ZMW 11.91 per share to ZMW 16.08 per share using a combination of the market approach and net assets method. The final decision for the MO was the lower end of the range. In short, the offer could have been better. However, ZCCM IH would rather not purse a premium offer indicative of a conservative stance from their management team.

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