On 30 January 2018, CDC and A P Moller Capital announced that they had made a bid to acquire Copperbelt Energy Corporation. According to the CEC website, the company is majority owned by Zambian Energy Corporation (“Ireland”) Limited (“ZECI”) which holds 52% shareholding whilst the balance of 48% is held by various institutional and retail investors. Details of the circular to shareholders indicated that condition precedents needed to be meet for the deal to go through.
Investopedia.com defines a condition precedent (CP) is an event or state of affairs that is required before something else will occur. Furthermore, in contract law, a condition precedent is an event which must occur, unless its non-occurrence is excused, before performance under a contract becomes due, i.e., before any contractual duty exists. For the CEC deal, several CPs were listed and cecinvestor.com reported the following as the status:
- the Minister of Finance of Zambia as holder of the Golden Share in CEC has consented to the change of control of CEC resulting from the Offer in accordance with the constitutional documents of CEC, on terms and in a form satisfactory to the Offeror;
- the Energy Regulation Board of Zambia, in relation to CEC’s transmission license, electricity supply license and electricity generation license, has been notified of the Offer;
iii. the COMESA Competition Commission has granted its approval of the Offer;
- the Lenders (as described in the Circular) to CEC have consented to the acquisition of a controlling interest in CEC pursuant to clause 7.2 of the Common Terms Agreement between CEC and the Lenders; and
- the Zambia Information and Communication Technology Authority (ZICTA) has consented to the change of control as required under CEC’s network license conditions and the Information and Communication Technologies Act No. 15 of 2009.
However, only 5 out of the 7 CPs have been agreed thus far. The following two conditions precedent to the Offer have not yet been fulfilled:
- the consent of ZESCO Limited (“ZESCO”) pursuant to Clause 28(b)(ii)(c) of the Bulk Supply Agreement (the “BSA”) to any change of control (as defined in the BSA) of CEC resulting from the Offer and the waiver by ZESCO of its right to terminate the BSA as a result of such change of control, on terms and in a form satisfactory to the Offeror; and
- the execution by CEC and ZESCO of an unconditional and irrevocable amendment to the BSA which provides for the extension of the term of the BSA for an additional period of 20 years on commercial terms which are no less advantageous to CEC than the existing terms of the BSA in a form and on terms satisfactory to the Offeror.
The last CP demands that there be a renewal of the Bulk Supply Agreement (BSA) for an additional period of 20 years. This is indicative of a desire to make the investment for the long term. However, applying investor ratios to CEC’s 2017 audited financial statements where it recorded an Earnings per Share (EPS) of 0.030 and a market price that is currently pegged at K2.07 per share gives us Price to Earnings ratio of 69. PE ratios are synonymous with stock selection and are used for valuing a company. In essence, the PE ratio indicates the kwacha amount an investor can expect to invest in a company in order to receive one Kwacha of that company’s earnings. At a PE of 69, a high ratio suggests that, CDC and A P Moller Capital are expecting higher earnings growth in the future. A high PE also indicates that the company they are acquiring is in growth phase. Evidence of CDC wanting to be a part of this growth is seen in their statement on their website which reads “CDC’s offer for the company is based on an explicit developmental strategy to expand renewable power generation in Zambia and increase regional power trading”. This was further echoed by CDC’s Head of Infrastructure, Sameh Shenouda who said: “Power infrastructure is vital for Africa’s economic growth and job creation. CDC’s bid for Copperbelt Energy Corporation will increase both renewable power generation in Zambia and the growth of regional power trading. Power outages cost African countries an estimated 1-2% of GDP annually and Zambia and its neighbours require an increase in the supply of reliable power. ”
A high PE was also an attractive preposition for the CEC management team as the rule of thumb for a seller is sell when the PE is high. However, a closer look at how the discussions around the remaining two CPs will be very interesting as this deal has potential to change the landscape of energy in Zambia. In a year that is also seeing reform through the Energy Regulation Board’s cost of service study, all energy players will be keen to see the final outcome.