By Isaac Munyuki
Recently, certain companies listed on the Zimbabwe Stock Exchange (ZSE) announced their intention to unbundle their non-core assets and list them separately on the ZSE.
Given the current challenges posed by the Zimbabwean operating environment, one would be asking whether this is a corporate survival strategy or companies simply seeking to create value and maximise shareholder returns.
The trend could be said to have started when in June 2015, Masimba Holdings Limited unbundled its plastic manufacturing division, Proplastics and listed it on the ZSE.
The same year, Innscor Africa Limited unbundled its quick service restaurant business into a new ZSE-listed vehicle, Simbisa Brands.
In 2016, Innscor proceeded with another unbundling when it spun off its retail and distribution business into Axia Corporation Limited which it listed on the ZSE on May 17, 2016.
The unbundling of both Simbisa Brands and Axia Corporation have largely been regarded as a success, with Simbisa Brands now seeking a secondary listing on London’s Stock Exchange Alternative Investment Market and is also reportedly seeking to acquire other strategic businesses in the food industry across Africa.
On September 28, 2018, Econet Wireless Zimbabwe announced its intention to unbundle its financial technology business, which includes EcoCash and other related businesses, and to list them separately on the ZSE.
A week later, Barclays Bank of Zimbabwe, which has changed its name to First Capital Bank Limited, announced that it planned spinning off its non-core banking properties into a vehicle to be listed on the ZSE.
The proposed unbundlings by Econet and First Capital Bank are the most recent evidence of this unbundling trend. Undoubtedly, this unbundling trend represents a new trajectory in the troubled Zimbabwean economy and raises pertinent questions in respect of the survival of corporates in the prevailing business environment.
For instance, are these unbundlings visible signs of an economy that cannot sustain diversified conglomerates?
Are they confirmations of an economy on its knees or signs of an economy in transition?
Could it be a case of companies reacting to certain regulatory limitations or simply a prudent restructure by companies to increase economic value and competitiveness?
Generally, divestitures by their very nature are mechanisms adopted by companies to create and maximise shareholder value by, among others, eliminating negative synergies in the corporate structure and making under-performing assets work harder under a management that is focused on growing their potential.
The current unbundling trend could be a signal that, in the current operating environment that is characterised by, inter alia, foreign currency shortages and embattled consumers, certain subsidiaries are no longer able to profitably contribute to the wider group other than sustain themselves.
It could also be an indication that large diversified conglomerates are no longer suited to operate in the current environment and are faced with failure.
Yet, this trend is in keeping with regional developments.
In South Africa, various listed conglomerates, including multinationals, have recently spun off their assets and listed them separately on the Johannesburg Stock Exchange (JSE).
For instance, Gold Fields unbundled certain of its mining assets into a JSE-listed vehicle, Sibanye Gold.
More recently, in September 2018, Naspers announced its intention to unbundle and list its video entertainment business separately on the JSE.
According to Bob van Dijk, Naspers CEO, Naspers’ proposed unbundling is aimed at unlocking value for shareholders and to create an empowered JSE-listed African entertainment company. Not much has been said about the Econet and First Capital Bank transactions, however, if one considers that both Econet and First Capital Bank have chosen to de-merge the assets and list them separately as opposed to putting them up for sale.
It could be argued that the primary driver of these spin-offs is the need to stimulate corporate innovativeness and to maximise shareholder returns.
But, if these assets were to be put up for sale, would they attract acceptable offers in the current Zimbabwean economic environment?
Whatever the reasons behind these corporate strategies, they are certainly likely to force executives of large diversified conglomerates to re-evaluate their corporate activities and strategies going forward.
These unbundlings also make for a good case study for those directors of medium-sized companies who may be contemplating mergers and/or acquisitions to diversify their operations.
It is, however, clear that while the current problems bedevilling the Zimbabwean economy cannot be cured by unbundlings, a properly thought out spin-off can indeed unlock value for shareholders regardless of the external constraints.
The success of some of the unbundled businesses is testimony to this.
From a legal perspective, corporate unbundlings are complex undertakings and companies seeking to unbundle will have to take into account various considerations in implementing the transaction.
These would include corporate and regulatory approvals, tax implications of the proposed structure, due diligence concerns in respect of the renegotiation or cession of key customer and supplier agreements and transfer of employees to the new entity acquiring the unbundled assets.
It is hoped this trend will help steer transactional activity in the Zimbabwean economy and benefit all the stakeholders.
Munyuki Isaac is a Johannesburg-based commercial lawyer and the views expressed in this article are his personal views and do not constitute legal advice.