adminfinancial aid from shareholders through rights issues totalling US$121,5 million. ABC Holdings Ltd’s rights offer of US$50 million in September last year was the biggest. However, after successful issues, financial cracks are beginning to appear.
Art Corporation may be the first, according to analysts, and the case should not be treated in isolation.
“The recapitalisation plans failed because the companies focused on sourcing funds to pay off part of their expensive debts without necessarily making changes to their operations or product offering,” says a recent investor report from stockbrokers, Lynton Edwards Securities.
“We believe that recapitalisation . . . is not the best way to handle the new economic environment. Increased competition has left many inefficient companies struggling to survive, and simply settling outstanding debt will do nothing to address this.”
Art Corporation is currently at the centre of a debt storm after auditors discovered gaping funding limitations. The maker of household utilities, schooling stationery and automobile batteries used US$3,9 million of its US$4,67 million rights offer money to repay debts. That means only 17 percent of the offer money was actually invested towards operations. Now, auditors are questioning the group’s financial health and ability to continue operations.
The company appears squeezed and unable to fund going operations, as current liabilities run ahead of current assets by US$2,6 million. Even after paying off significant debts in the past three years (US$1,04 million in 2012), the group remains debt-ridden. It reported total short-term borrowings at US$6,7 million during the year to March 2013, far above liquid cash at US$1,3 million. That’s got the market worried that many more firms could be in serious debt, facing viability challenges.
“A lot of companies now have their viability status seriously in question despite raising new capital in the last couple of years,” said the report. In response to their own weaknesses, companies are now rationalising operations. That is essentially a euphemism for cutting jobs to reduce costs and improve savings, well, in the majority of cases.
Financial analysts argue that “rationalisation is a by-word for being flexible and recognising that the economic landscape is fluid – companies must adapt to survive.”
Pearl Properties cut costs by 25 percent when the group restructured its shared services last year and Innscor Ltd is benefiting from the rationalisation of the SPAR brand.
Dairibord expects annual savings of US$1 million from its rationalisation concluded recently. Hunyani, Olivine and Masimba Holdings, formerly Murray & Roberts, have all announced plans to streamline operations to limit costs. Olivine is currently struggling with cash flow, and parent company, AICO, plans to demerge the unit hardly four years after its acquisition, to improve group efficiency.
“In short, there is no doubt that rationalisation either via long-overdue consolidation or shift in business model can be anew to improve the viability and profitability of Zimbabwean companies,” Lynton-Edwards Securities said in the report.
“However, chopping and cutting companies must be cognisant of the fact that cutting in the wrong places can seriously affect the ability to bounce back if and when the economy improves.”
Most of the companies listed on the Zimbabwe Stock Exchange today are predominantly holding companies. This business model is historical. It has been precipitated by the economic difficulties of the last 11 years, which prompted mergers or failure, according to a report released by Imara Edwards Securities last year.
“It appears to have been a better and manageable business model, under the past circumstances, even with evident structural imbalances on synergy. Now corporates seek change, and they have secured it through unbundling,” it said.
Online Reporter