$ 75,000,000
International Private Placement
Introduction
On the evening of October 3, Raymond Franklin, Duke MBA and emerging markets portfolio manager with a leading Wall Street firm, was walking down Park Avenue on his way home. His mind was lost in thought. He was mentally updating his notes and recollecting the compelling story he had just heard at the Meikles Africa Limited roadshow presentation at a mid-town hotel.
Although he had learned a great deal about sub-Saharan Africa in the last week, he knew very little about Zimbabwe, and apart from the information in the placement memorandum and the roadshow presentation, not much else on Meikles Africa Limited itself. Judging from the interest shown by investors at the presentation, this placement would be hot with emerging market funds. Raymond had 72 hours in which to motivate a decision to his investment committee and return to the bankers with a firm commitment. He turned the corner and hailed a cab. As he settled in the backseat, he quickly mumbled the address of his office and hurriedly punched a string of numbers on his Nokia handset. There was no time to waste.
Zimbabwe: A brief History
The origins of the indigenous people of Zimbabwe can be traced back to the 12th century, when the principal inhabitants of the land were the Shona people. In the mid-19th century, another main ethnic group, the Ndebele, who arrived from what is now South Africa and settled in the Bulawayo district. In 1890, the first Europeans in a “pioneer column”, organized by Cecil Rhodes, arrived in the country and dominated what was already a delicate balance of coexistence between the Shona and the Ndebele people. The country became known as Southern Rhodesia and was a “self-governing” colony of the British Commonwealth. These events and the interests of these three groups, in particular on matters concerning universal suffrage and property rights would set the stage for most of the political events within the country over the 20th century.
Political Environment
The country gained independence from Britain in 1980 and became know as Zimbabwe (although a earlier government, under the political leadership of the Rhodesian Front, had unilaterally declared independence from Britain in 1965) following a constitutional conference convened by the new Conservative government at Lancaster House in London in 1979. Among other things, the Lancaster House Agreement guaranteed universal suffrage, which saw the Zimbabwe National Union-Popular Front (“ZANU PF”) come to power in April of 1980 winning 57 parliamentary seats or 63% of votes and has remained in power ever since, winning subsequent elections in 1985, 1990 and 1995. Exhibit 1 shows election results and the composition of seats in the Parliament, the main law-making body within the country. In December 1987, unity talks between ZANU PF (which primarily represented the Shonas), and ZAPU ( which mainly represented the Ndebeles) the main opposition party were concluded, culminating in a merger of the two parties under the ZANU PF name two years later. Senior officers in ZAPU were integrated into government and the leader of ZAPU accepted a position as one of the country’s two vice-presidents. The losing parties in the 1980 election have since virtually disappeared and any others that have emerged or alliances that have been created since then, have failed to be a serious political challenge to the ruling party. Electoral apathy by voters has steadily increased with less than 50% turnout in general elections and as low as 5% in by-elections.
Economic Environment
With its well-diversified manufacturing sector, prosperous commercial farming, varied mineral resources and a relatively dense infrastructure, the Zimbabwean economy is much more diversified than those of all its neighbors, with the exception of South Africa. In fact, it is less dependent than the latter on mining, both as a share of GDP and in exports. Of the productive sector, manufacturing is the most important, generating approximately 25% of national income, although in value of output and export earnings the two leading commodities are tobacco and gold. However agriculture, despite of generating less than 15% of GDP, and mining at barely half that level, still dictates the overall health of the economy. Exhibit 2 shows comparative economic indicators for Zimbabwe with some of its Southern African neighbors and with the UK and the US.
With respect to fiscal policy, strict controls on foreign currency allocations produced trade surpluses and a reduction in the debt service ratio. Almost the only nation in sub-Saharan Africa, Zimbabwe avoided the need to reschedule its foreign debt, but the price was an extreme shortage of imported consumer goods and industrial products. Self-imposed external discipline was not matched internally, with state subsidies continuing (albeit at declining levels) on essential foods, fuel, health, education and defense contributing to government deficits of around 10% of GDP. Exhibit 3 illustrates the government’s fiscal record since 1992/93. In the two years after independence, the economic growth was a spectacular 21%, on the back of peace, international legitimacy, exceptionally good rains and the stimulation of internal demand arising from wider economic participation by the populace and large wage increases. Since then, economic growth has been erratic, largely influenced by weather patterns and agricultural performance. Severe droughts in 1982-84, 1987, 1992 and 1995 produced contractions in the economy, offset in part by rapid recovery in subsequent years. Average growth rate of GDP in the 1980’s was 4% per year, while in the 1990’s up to 1995 was 2% per annum, despite the decline in US$ figures due to successive devaluation. In his July 1996 budget speech to Parliament, the finance minister forecast real growth in GDP of 7% for the fiscal year ending June 1997. Exhibit 4 illustrates the summary of the economic forecasts for the country to June 1998.
Monetary policy was governed by the Reserve Bank of Zimbabwe and was primarily focused on exchange rate policy, interest rate management and supervision of the financial sector. By 1995, controls on trade and current account transactions had been substantially removed and the local currency was moving towards free convertibility for current-account transactions, this policy would enhance prospects for foreign investment.
While exchange controls related to capital account transactions by foreigners remained on pre-May 1993 investments, post-May 1993 investment enjoyed unlimited remittance rights with respect to dividends and capital, but such favored investments were limited to no more than 35% of aggregate foreign ownership in the issued share capital of the investee company. Zimbabwean investors continued to be subject to exchange control approval for the purposes of either raising foreign capital or making foreign investments. In addition, capital gains taxes arising on investments in listed securities on the Zimbabwe Stock Exchange where reduced from 30% to 15%. Exhibits 5 illustrates selected monetary policy indicators.
Meikles Africa Limited – Historical Background
The founders of the Meikles businesses, the Meikle brothers, started their business with a general store in Masvingo in 1892. This was the start of the development of a retail chain that was to spread throughout the country. In 1915, Thomas Meikle founded the Meikles Hotel in Harare, the capital city of Zimbabwe. Throughout most of the twentieth century, the Meikle family focused on growing the retail and hotel interests (collectively “the Meikles businesses”) either organically or by means of acquisitions. In the late 1950’s significant investments were made to upgrade the Meikles Hotel. In the mid-1970’s the retail business acquired control and took over the management of the Greatermans department store which was followed a subsequent acquisition of Barbours department store in the mid 1980’s. Greatermans and Barbours were both leading department stores in Harare.
In September 1996, the Meikles businesses, undertook a successful merger with Northchart Investments Limited, a publicly traded company, (holding investment interests in Southern Africa) on the Zimbabwe and London Stock Exchanges. The merged firm was renamed Meikles Africa Limited and was well positioned to access the domestic and international capital markets to finance new growth opportunities.
Description of the Meikles Africa Businesses
Meikles Africa Limited comprises five subsidiary companies as indicated in Exhibit 6. The principal operating subsidiaries are Thomas Meikles Centre (Private) Limited (“TMC”) (incorporating the hotel and department store businesses) and Thomas Meikle Supermarkets (Private) Limited which operates the supermarket retail interests (“TMS”) of the group. Thomas Meikle Properties (Private) Limited, Ninety Speke Avenue (Private) Limited and Petria Properties (Private) Limited are property owning subsidiaries of the principal operating business units within TMC and TMS. Exhibits 7, 8 , 15 and 16 illustrate Meikles Africa’s financial statements.
The TM Supermarkets Business
TM Supermarkets operates 35 stores, with a further 4 stores currently under construction, one of which is replacing an existing unit. The geographical distribution of these stores is shown in Exhibit 9and the growth in the number of stores and the total selling area, of stores since 1992. TM Supermarkets stock around 16,000 product lines covering a wide range of goods, with emphasis on food and other consumable items. In the year ended 31 March 1996, over 90% of sales were of food and daily home use items. The supermarkets do not offer consumer credit and most of sales are for cash, check or credit card transactions. The supermarket has a chain of approximate 1,000 suppliers, for many of whom TM Supermarkets is the largest single account. The prices with suppliers are negotiated centrally for the chain as a whole and the approximate average settlement period for supplier accounts is 7 weeks. Over 90% of the goods sold in the supermarkets are of Zimbabwean origin, with the majority of imports coming from South Africa.
Competitors
In addition to competing with smaller grocery, specialist and convenience stores, TM Supermarkets competes with other supermarkets and cash and carry stores and franchise outlets. The most significant competitor is the supermarket chain of “OK” which operates 29 stores and “Bon Marché” which operates 5 stores. A single owner, Delta Corporation Limited, operates both OK and Bon Marché. The most significant cash and carry competitors are “Jaggers” and “Metro” both of which have one modern outlet and a number of small units. There are also 70 “Spar” franchise stores which compete with TM Supermarkets. These franchised outlets are mostly of smaller size than TM Supermarkets stores. Exhibit 10 compares TM Supermarkets with the OK & Bon Marché chain.
Strategic Alliance with Pick ‘N Pay
In May 1996, TM Supermarkets and the South African supermarket chain, Pick ‘N Pay, agreed to form an association. This association covers a number of aspects, including the provision of retail expertise from Pick ‘N Pay. In addition, TM Supermarkets will be able to procure the supply of both food and non-food merchandise through Pick ‘N Pay at more competitive prices and terms than at present. The arrangement involves Pick ‘N Pay owning 25% of the issued share capital of TM Supermarkets (Private) Limited in consideration of a reciprocal
investment of 30 million South African Rand[1] (approximately US$ 6.5 million) by Meikles Africa Limited in Pick’ N Pay. These reciprocal investments are both subject to the approval of the exchange control authorities of the South African Reserve Bank (in the case of the Pick ‘N Pay investment) and the Reserve Bank of Zimbabwe (in the case of the Meikles Africa Limited 30 million Rand investment in Pick’N Pay). The arrangements with Pick ‘N Pay also involve the setting up of a new joint venture company owned on an equal basis by Pick ‘N Pay and Meikles Africa Limited, for the development of supermarkets in other African countries.
The Hotel Division
The Meikles Hotel is a modern, luxury hotel that caters primarily to the international business traveler, visiting heads of state and up-market tourists visiting Harare. The hotel’s restaurants and banqueting facilities serve around 45,000 covers per month, and about 60 per cent of these are non-hotel residents. The Meikles Hotel has the largest number of food and beverage outlets of any city hotel in Southern Africa. In 1995 the hotel was named the “Best Hotel in Africa” and voted runner-up in the category of “ Best Conferencing & Banqueting Hotel in the World”. The Meikles Hotel provides the usual services of a luxury hotel, including a beauty palour and saunas, swimming pool, gymnasium, and a fully equipped business center and ancillary services. Meikles Hotel became a member of the Leading Hotels of the World marketing agency in 1995. It is the only Zimbabwean hotel and one of only three hotels in Southern Africa with membership in the Leading Hotels of the World marketing agency.
The hotel derives approximately 60% of its occupancy and a significant percentage of its revenues from business travelers, a proportion that is significantly above that of its competitors. Although Meikles Hotel earns a substantial portion of its revenues in foreign currency receipts, exchange control regulations permit it (as well as other exporters) to deposit and retain up to 60% of such receipts in a foreign currency account (“FCA”) on completion of an exporter of services form (“Form S”). The remaining 40% balance is required to be converted immediately into local currency at the current exchange rate quoted by the Reserve Bank. In addition, balances retained in a FCA can be utilized to make approved foreign payments for reinvestment within the hotel within 90 days of the original deposit being made. On the expiration of the 90-day period, any remaining balances in the FCA must be sold at the current exchange rate to ensure liquidity in the interbank foreign currency market
Competitors in the Hotel Industry
The other major five star hotel which compete with Meikles Hotel in Harare is the Sheraton Hotel.. The Meikels Hotel also competes with a number of four and five star hotels in Harare. These include the Holiday Inn Crowne-Plaza Monomapata , the Holiday Inn Garden Court and the Best Western Jameson which are operated by Cresta Hotels. . The Holiday Inn Crowne-Plaza Monomapata and the Holiday Inn Garden Court are owned by a single operator, Zimbabwe Sun Hotels (see Exhibit 11). The Harare hotel market has experienced a long term trend in real growth in demand. There are currently no new hotels under construction in Harare. These factors, together with the strong economic growth forecasted for the country) following a prolonged recession, give management confidence that demand for beds by corporate guests and up-market tourists in Harare should continue to grow.
The Department Stores
1
The department store chain comprises of Greatermans, Barbours and MeiklesStores.. These stores are the only major department stores in Zimbabwe, located in the country’s cities with 25600 square meters of aggregate selling space. The department stores’ customer base covers wide cross-section of the population. The Barbours store targets the high-end customer segment and Meikles and Greatermans stores have a wider appeal. Each store has about 35 departments and sells a wide range of products, including clothing, household appliances, cosmetics and stationery. Exhibit 12 indicates the sales mix for the department stores in the year ended March 1996.
Approximately two-thirds of all sales are on credit terms. This is caused by the lack of publicly available customer credit in Zimbabwe. Short-term credit is provided using in-store credit cards. There are about 60000 active card users. Settlement terms on the cards require payment of at least 25% of the balance on the account within 30 days, while the balance remain outstanding. Interest is charged on outstanding amounts. Long-term credit is provided for periods of 12, 18 and 24 months at fixed interest rates. Approximately 90% of sales of big ticket household items are on long-term credit. Long-term credit customers are required to pay a 10% deposit and enter into a deferred payment agreement. The department stores discount the long-term receivables under these agreements with finance houses to alleviate the cash flow burden on the company.
The department stores continue to be exposed to the credit risk in these receivables, but are able to earn a credit spread between the fixed interest rate charged on the long-term receivables and the rate used to discount this annuity stream by the finance houses. Historically, Historically the firm has experienced a low volume of bad debt expenses. The supply of merchandise is largely from Zimbabwe-based suppliers, although about 20% of supplies are direct imports.
Competitors
The department stores compete with national and regional department and variety stores and with specialist retailers. The key competitors are Edgars and Express Stores Chain and Truworths in clothing, Jaggers and smaller specialists in the consumer durable goods and electronic products segment. None of these competitors provide the breath of product offering comparable with either Greatermans, Barbours and the Meikles department stores. Exhibit 13 illustrates competitors in the department store business.