Mboweni Speaks On Econet Wireless Deal in Zimbabwe

Mergers, Acquisitions and Financial Results

Econet Wireless Holdings (EWH) held a stormy Extraordinary General Meet-ing (EGM) in Harare last Friday where a proposal to acquire equipment worth about US$94 million from Econet Wireless Global (EWG), a company owned by founder, Strive Masiyiwa, was tabled for consideration by shareholders.

In this Question & Answer with The Financial Gazette Reporter Munyaradzi Mugowo (MM), chief executive officer Douglas Mboweni (DM) speaks on this and other issues.

Q: Why did the company choose to buy the equipment from Econet Wireless Global (EWG) instead of a third party supplier given that Strive Masiyiwa, who controls EWG, has an interest in Econet Wireless P/L?

A: The equipment facility is valued at US$93,9 million. We have not been able to identify a bank or an equipment supplier willing to take the financial and political risk for such a large facility to a Zimbabwean company. Secondly, EWG is the majority shareholder, and parent company of EWH in Zimbabwe.

EWG has operations and interests in 14 networks in Africa, Asia, and Latin America.

EWG is therefore in a better position than EWH to negotiate equipment facilities on favourable terms and prices. This is standard practice in any industry.

The fact of the matter is that EWH would not have been able to survive as a business during the worst phase of the Zimbabwe economic and political crisis had it not been for EWG's consistent support.

EWG did not participate in the voting, which was supported by the overwhelming majority of those people who attended the EGM. We strongly believe that the proposed financing structure is the best option available to us.

The horizons for businesses to get credit from the financial markets are limited. This is especially so for Zimbabwean companies. The perceived country risk, in the opinion of offshore lenders, ma-kes it hard for us to raise capital on the international markets. With EWG, we are also able to negotiate terms that are to our advantage on a number of accounts; Firstly, the fixed monthly payments allow us to plan ahead, managing our cash flows, which is absolutely critical.

Second, and as indicated to our shareholders, the provision allowing EWH to purchase the equipment ensures ownership of the assets, which will still have productive life beyond the tenor of the instalment sale and depreciation period. Third, a cash sale -- which really is what we would have got from the open market because of the reasons I gave earlier -- would have required us to commit a significant, single cash payment.

Q: Shareholders raised concern about the pricing of the equipment alleging that an open market deal would cost less than the US$94 million charged by EWG? What is your take on this?

A: The Econet network is supplied by only two suppliers, and the prices offered under the EWG arrangement are consistent with the prices from these suppliers over the years, and in many instances better. It was alleged by the dissenting shareholders, and widely circulated by Zfn, that it would have been cheaper for us to source 'base stations' in Zimbabwe than to import.

This is an extraordinary claim. Base stations are only manufactured in a small number of countries, notably places like the USA, China, Sweden, Finland, France, and Germany. Even countries like the UK, Italy, and South Africa, do not have the technical expertise to develop a base station. We can only surmise that such allegations are driven by malice. Any clarification sought by the shareholders at the meeting was given.

Q: You mentioned in your circular to shareholders that part of the payment for the equipment will be in the form of new Econet Wireless Holdings (EWH) ordinary shares. How many shares is the company planning to issue?

A: The transaction will result in 8,464,628 EWH ordinary shares being issued to EWG.

Q: How will it alter the company's issued and authorised share capital?

A: As a result of the transaction, issued share capital will increase from 169,292,579 to 177,757,207, while authorised share capital will not change from 300,000,000.

Q: Why did Econet directors choose to settle part of the transaction in Econet Wireless Holdings ordinary shares instead of pursuing other credit options?

A: The incorporation of the share component into the pricing of the shares was intended to ease the burden on the company's cash flows. EWG should rather be commended for accepting consideration in the form of shares instead of cash because equity based funding structures are preferable to other structures in uncertain times such as these.

Q: Had the deal been approved, how would it disenfranchise Old Mutual and other shareholders?

A: The transaction was in fact approved. There are many companies with the words "Old Mutual" in their name. Some of them are our shareholders, others are not. Any shareholder that submitted a proxy in respect of shares that they own was allowed to vote on their shares. However, there is an asset management company that wanted to vote using shares belonging to other people without the knowledge or authority of such people.

We rejected those votes because they were not votes by our shareholders, but votes by imposters who want to stop the growth of the company for no valid reasons. In any event, their votes were not even enough to stop the transaction. We cannot comment specifically on a single shareholder. It is important to really explain the rationale behind this important transaction and the benefits to shareholders.

Our low penetration level in Zimbabwe, at 9 percent compared to the regional average of 40 percent, presents huge potential for growth. This is what we are trying to exploit, by expanding capacity to mop up this massive demand.

We will be in a position to add 500,000 new subscribers and at the same time adding the switching capacity of the network to handle an additional 2,000,000. In essence, this is the basis for the entire transaction; to increase the number of subscribers, improve quality of service and therefore get higher volumes of traffic through the network. The result is an increase in the average revenue per user and therefore increased profitability, which is basically what the shareholder expects.

Q: What reasons did Old Mutual and other shareholders give for turning down the proposal?

A: The majority of the shareholders voted for the transaction, and a minority did not. Therefore it is not correct to speak of the transaction as having been turned down when it was approved with the requisite majority. Those who voted against would have their own reasons. What is important is that to the extent that any such reasons were stated, they were disregarded by the majority, excluding EWG.

Q: Econet revealed plans to launch GPRS a long time ago, but so far nothing has happened. What has delayed the launch of the new technology and when should your clients expect it?

A: You will be glad to know that, after the success of the test period, we have begun a phased launch of the GPRS service. This week, we began billing customers on the test panel. This is in preparation for a launch to all our customers at the end of this month.

Q: What challenges are you encountering as an industry and when do you expect to see an upturn?

A: The major challenges that telecommunications companies, Econet included, continue to face are the continued erratic supply of power to our key installations, such as base stations, and also the heavy burden arising from duties and other fees. We commend very much government's reduction on VAT, and we are hopeful there will be further reviews on other fees.

Q: What is your response to subscribers' concerns that pre-paid and post-billed tariffs are too high given that disposable incomes in the country are severely low?

A: The tariff on our popular Buddie package is 23 cents/minute (26c including VAT). We believe that this is largely at par with regional tariffs. That said, we at Econet continue to seek out new ways of easing the burden on our customers. Since January, we have introduced several services and products specifically focused on the needs of the consumer. This will continue to be a key area of focus for us.

Financial Gazette