adminHailey Tsarwe Business Correspondent
STARTING a business is never easy. Building it into an empire is even more difficult. Regardless, it is the dream of everyone who owns a business to see it grow.
Whatever strategies used, be it growing the same line of business or putting a little bit of everything into their business portfolio, the eventual result is satisfying.
The bigger and more synergised the business is, the larger the perceived benefits in times of an economic boom.
However, during a depression, the losses can be bigger and the demand for capital is higher. Over the past 10 years, business growth in Zimbabwe has been little. A few expansion exercises are, however, notable.
One of the acclaimed deals that took place during hyperinflation was the formation of the AICO Group in 2008.
Under the deal, AICO took over the total shareholding of Cottco and shareholders were awarded two shares in AICO for every three Cottco shares held.
Cottco already holds 50,16 percent stake in Seed Co. Automatically, Seed Co became a subsidiary of the AICO Group following the restructuring. In addition, AICO further acquired a 49 percent stake in Olivine in 2008 as part of its diversification exercise.
To sum it up, AICO had effectively created a conglomerate in the agro-processing industry which had the objective of creating diversification benefits for shareholders.
However, following the dollarisation of the economy in 2008, the group was not spared from the need to recapitalise, as was the case with other local companies.
The market proved to be a difficult playing field as liquidity was scarce and interest rates were high.
In desperation most companies, including AICO, borrowed short-term money at ridiculously high rates in a bid to keep their operations going.
This has proven to be disastrous, as years later, companies are debt ridden and unprofitable. Only those that managed to get shareholder funding turned victorious.
AICO has been dominating the under-achievers since dollarisation mainly due to its debt legacy.
The credit lines that they managed to receive were injected into mainly Olivine but failed to change its fortunes as the unit required a significant injection, preferably in the form of capital to record material changes.
News on the market is indicating that AICO wishes to unbundle Cottco and Seed Co into standalone units.
The former will then relist on the Zimbabwe Stock Exchange, as AICO simultaneously delists.
This will bring to an end the five-year-long life of one of the few conglomerates listed on the local bourse. If it goes ahead, the unbundling is arguably a rational move by management to try and unlock value out of the group.
Firstly, the group has struggled to fund all its operations and hence only trickled down paltry funds across units, which in turn failed to bring the desired results.
Secondly, cotton prices have been on the decline, and this has impacted national production and subsequently cotton intake by Cottco.
Already management has issued a profit warning for Cottco, as a result of the unfavourable conditions on the market.
Olivine, on the other hand, is struggling to become competitive on the back of old machinery and general lack of funding.
A general appraisal of the business is necessary to establish what will make money in future and what will not. It is highly likely that the Cottco business will continue suffering due to the fall in cotton prices.
Most farmers have shunned cotton farming in favour of other cash cow crops such as tobacco. Those that have continued to farm the crop have been pushing for price controls, which will be damaging for Cottco, if implemented.
Olivine is not likely to get out of the woods anytime soon, as it requires huge amount of money to recapitalise and get its machinery up to date.
Whether or not this will happen in the near future, is anybody’s guess. It would seem that the Seed Co business presents more potential than any of the other units.
Although there has been a rather uncomfortable debt accumulation, if it is handled, the business has prospects of producing significant profits.
The thrust is up to shareholders to decide which business works in this environment and focus mainly on that.
Streamlining of business is not a new phenomenon in our market. It is always good when businesses grow as it represents a positive ripple effect to the economy.
However, in times of stifled economic growth and scarce liquidity, something has got to give. Business people are in it to make money and realigning their models to suit the environment determines whether you survive the tide or you get swept away.
Most companies in Zimbabwe are in need of capital and to manage the little liquidity that is available, it is necessary to appraise the core business that should be focused on. A few have managed to keep a chain of businesses in one pool and made it work at the same time. Innscor is one such example and the expansion drive is ongoing.
Adequate funding has necessitated the growth as they have the capacity to fund its own capital expenditure. However, it has not been a success story for other players.
TN Holdings failed to maintain the business empire at its size, as the model proved too risky and demanded deeper pockets to maintain.
Arguably, leaving diversification to the shareholder, and focusing on what is core as a business, is not a bad idea at all.
Online Reporter