28 April 2017

Zimbabwe: Why Meikles Ltd Is Targeted for Takeover

opinion

That sooner or later Meikles Africa Ltd, a symbol of quality earnings and resilience on the exchange, would become a takeover target was inevitably going to come and merely a matter of time.

Just last year, a plot to remove Meikles Ltd executive chairman John Moxon and replace him with a former chief executive of Lornho's agricultural unit, Benjamin Ward, was reportedly unearthed.

The plot, which was said to have gained traction from ambitious and influential businesspersons and politicians, would see the British-born and South African-educated businessman, take control of the business from Moxon.

Ward, it was claimed, was interested in controlling Meikles' assets such as Tanganda, a thriving tea estate in the eastern highlands, the group's financial services company MFS, and the iconic Victoria Falls Hotel. So the story goes.

Until then, no major move on the group had been made. As at April 21, a market cap of US$32 million and price-to-book ratio of 0,18 and a price-to-earnings ratio of 50, Meikles was grossly undervalued.

The group had total assets amounting to US$282 million in the half year to September 2016 and total liabilities of US$155 million, implying a book value of US$127 million. The company's market cap represented only 23% of its book value. In the full year to March 2016 (FY16), Meikles was trading at a discount of 86,7% to its book value.

Meikles owns TM Supermarkets, the largest retail chain in the country in partnership with South Africa's Pick n Pay, department stores, hotels and a tea producing and manufacturing entity, Tanganda Tea Company.

Its TM and Pick n Pay realised revenues of US$395 million in FY16 with hotels bringing in US$15,8 million, agriculture US$22 million, department stores US$6 million and wholesaling US$2 million, bringing total revenues to US$453 million.

Now, a Dubai-based billionare, Ali Albwardy, has made a takeover bid for Meikles Ltd. The offer is being considered. It is not the only transaction value investors have come in on the market.

Albwardy's experience with Africa could have helped inform his decision at a time many an investor is exercising caution on Zimbabwe markets.

The move into Zimbabwe is a bold move to grow his business in Africa. Albwardy already owns three hotels in Tanzania -- the Kilimanjaro Hotel in Dar-es-Salaam, a beach hotel in Zanzibar and a lodge in the Serengeti national park.

Although the terms of the offer have not been made public, analysts reckon Moxon and the Meikles family and other shareholders such as Old Mutual would want to realise value higher than the prevailing market rates.

In FY16, Meikles supermarkets were valued at US$91,8 million, hotels at US$47 million, Agriculture division worth US$72 million, departmental stores were valued at US$31 million, wholesaling US$4 million and corporate with a value of US$35 million.

OK Zimbabwe, TM's biggest rival in the market, has a market cap of US$71 million. OK is the second-largest retailer in the country.

Meikles' retail arm is not listed, but had turnover of close to US$400 million in FY2016.

OK Zimbabwe revenues for the full year to March was US$437,5 million.

Meikles' balance sheet as at September 2016 showed current borrowings amounting to US$65 million and non-current borrowings of US$6,3 million.

Of the US$65 million current borrowings, US$44 million were supermarkets division liabilities while hotels share was US$23 million. Agriculture's share was US$32 million.

Around US$17 million was generated from operations. Cash and balances at the end of the period amounted to US$12 million from US$16 million.

A total US$3,5 million was paid in net interest. In the full year to March 2016, the group had paid US$10 million in finance costs. At the beginning of the financial year, Meikles was sitting on US$10 million, slightly lower than FY15 amount of US$12 million.

The high finance charges hit the bottomline, culminating in a loss for the year of US$19 million. Against such a background, others say this was a long way coming.

Where wheels came off

A fight between Moxon, a poster boy of successful family enterprise and Nigel Chanakira, once an inspiring story of a self-made millionaire determined to make it to the very top, had erupted in perilous financial times.

Since 2004, inflation had been rising. By 2007 going forward, it was clear to all and sundry that inflation was out of control. By the time, the Moxon and Chanakira fight erupted in 2008, hyperinflation had decimated the value of companies. Meikles Ltd itself was no exception. A price control policy by government and hyperinflation saw goods disappear from shelves with no hope of being replaced.

Missing the goal

Incidentally, when Zimbabwe adopted multi-currencies at the height of hyperinflation in 2009, Moxon and Chanakira were at each other's throats.

On the other hand, other focussed businesses on the ZSE quickly realised the need to raise capital and remodel as of paramount of importance.

Meikles competitor on the supermarkets chain side, Ok Zimbabwe, raised funding through a US$15 million rights issue underwritten by Investec.

On the hotels side, African Sun also raised US$10 million for the refurbishment of its six hotels through a rights issue around the same time.

Moxon was specified by the government amid suspicions he had smuggled foreign currency outside the country, leaving the affairs of Kingdom Meikles Africa Ltd in the hands of the board and management.

It was the first in more than a decade Meikles had not been without Moxon in a leadership position.

Although Moxon successfully disentangled himself from the messy and acrimonious merger with Chanakira's Kingdom Financial Holdings Ltd and returned in June 2011 to the helm of the old Meikles, a shining beacon of colonial capital, the group had never been the same. In fact, it never re-established itself as the Meikles of old, a darling of both asset managers and individual investors.

With hyperinflation a thing of the past, Meikles seemed on course to recovery. But the blue chip status, long associated with to the company, was not as nostalgic for investors in the dollarised economy, keen on getting value.

Meikles, an enduring legacy of one of the pioneering entrepreneurs in the country with its roots firmly entrenched in the founding patriarch, Thomas Meikle, Moxon's maternal grandfather, was a bit misunderstood. And in the aftermath of the ugly spat between Moxon and Chanakira, new investor darlings had been found. Romance for the Old Mutuals, the Deltas and Econets and the Seedcos had continued in the meantime with other counters with good fundamentals getting the attention of investors.

Back in the day, Meikles was a darling of both institutional and individual investors. In hyperinflation, the counter along with many other perceived blue chips had continued to perform ahead of inflation consistently.

With the KMAL chapter closed, shareholders were advised in January 2012 that Gondor Capital Limited, a company linked to a "shareholder entity in Meikles" had intentions of raising US$200 million for investment in Meikles and other projects.

Meikles would take up shareholding in Mentor and merge the flagship Cape Grace Hotel into Mentor whilst the funds initially held by Mentor on behalf of the Cape Grace would be converted into equity in Mentor. The market was suspicious of the deal.

The Mentor shareholders were once involved in Rebhold/Mvelaphanda in which the Meikles Group invested, the market was told.

Mentor Holdings is a South African- domiciled investment shell company with a growing and diversified portfolio of investments. One of these is Wings Inflight Services, which is a joint venture with Dnata, which is a member of the Emirates Group.

The firm is the world's fourth largest provider of in-flight catering and allied services to international airlines to and from South Africa. The company has state-of-the-art catering facilities located in Johannesburg and Cape Town.

Its major customers include Emirates Airline, British Airways International, Singapore Airlines and Thai Airways.

In 1996 Meikles had invested R5,2 million in Rebhold/Mvelaphanda and realised R60 million during the period of investment that lasted until 2007.

Although the Mentor transaction sailed through in June 2012 of the same year, regulatory hurdles arose amid corporate governance concerns and a consensus Meikles was run like a private business.

"In exercising our overaching mandate as the regulator of capital markets, the SECZ is concerned by the information asymmetry regarding Meikles Limited. Information the Commission deems material in that its disclosure would probably have an impact on the Meikles Limited share price is being withheld from the market. It is the SECZ's duty to ensure that information reasonable investors would want to know before making an investment decision is availed to them," the Securities Commission of Zimbabwe said in a circular.

"For this reason Meikles Africa is being asked to address the issues raised below thus enabling all shareholders, minorities in particular, and all capital market players to have a better understanding and basis for valuing Meikles Limited."

For instance, while there were genuine attempts to woo investors in mining through Centar mining, the deal fell through.

Other promises US$200 million would be availed for investment to the Meikles group at the time the deal was promoted have remained just that: promises. But could shareholders have been taken down the garden path to agree to the 2012 deal?

Some feel this could have been the case.

Against such a background, it was little surprise when news of the takeover bid emerged a few weeks ago.

Analysts say Albwardy's move could help unlock value in Meikles.

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