ZimRe to the rescue as CFI bleeds

Published: 14 July 2017

The company is completely de-capitalised. Every unit has a working capital deficit. This is clear from the financials. This, in my view, clearly shows he doesn't know how to run a business of this magnitude.

That a fight would erupt at CFI Holdings sooner or later was a foregone conclusion. With the appearance of relatively younger and more focussed shareholders on the scene in the form of Hamish and Simon Rudland - self-made millionaires with a nose for value investments on the market - and aggressive tycoon Nicholas van Hoogstraten, the announcement to the market last month that Stalap Investments, a ZimRe Holdings Ltd and National Social Security Authority (Nssa) investment vehicle, would make an offer to buy out minorities, became the last lap in the race to control CFI.

By making the announcement, Stalap had a 42% stake in CFI and would under the Zimbabwe Stock Exchange (ZSE) listing rules be compelled to make an offer to minorities in the coming weeks, shareholder differences in CFI could have widened.

The planned offer to minorities - widely seen as the light at the end of the tunnel for the capital-hungry business and a precursor to a rights offer or some form of capital raise, for long on the cards should they obtain the shares necessary to get 51% of the company's issued share capital - will eventually come through.

A ZSE listing committee had last week ordered that Messina Investments, an investment vehicle controlled by van Hoogstraten, should also make an offer to CFI minorities, a decision Stalap contested.

The ZSE has since capitulated on its earlier position, which had been questioned by many as presenting potential problems in the manner the bourse conducts itself when applying its own rules, paving the way for Stalap's offer.

This is the latest in the many fights for the control of the group.

Formerly the Farmers' Co-operative Society and in existence since 1908 with the principal objective of marketing maize, CFI's future is not certain anymore.

Three of its subsidiaries, Agrifoods, Victoria Foods and Suncrest, are under judicial management.

With a fortune reported to be running into several hundreds of millions of British pounds, van Hoogstraten has acquired a reputation for picking his fights carelessly in the market and losing badly in some cases.

His attention of late has shifted away from Hwange Colliery Limited and Rainbow Tourism Group where annually he stirs controversy at annual general meetings to CFI, where he has a 35% equity stake. Around 7% of the equity was bought last month from the Mining Industry Pension Fund (MIPF) in a trade that courted the anger of the Nssa, who had made a bid to acquire the same shares at a premium to block Van Hoogstraten from controlling CFI.

The Rudlands on the other hand are no passive investors. A week after acquiring majority shareholding in ZHL, the majority shareholders in CFI, the younger of the Rudlands, Hamish, had visited the CFI head office on Wynne Street in central Harare, home to the group's flagship Farm & City.

His mission, management would later establish, was to understand the business a bit more and see how to get out of the current problems.

Unlike van Hoogstraten, a passive investor, the Rudlands believe in actively engaging. Van Hoogstraten had until recently not been seconding people to the boards of companies he was invested in.

After closing the ZHL deal, Rudland told businessdigest he had a plan to unlock value at CFI, raise capital, deal with costs across the group and restore the group to its former glory.

"Our ambition is to recapitalise the CFI group through various instruments currently being worked on. The group has great Zimbabwean brands," Rudland said in a telephone interview with businessdigest in June 2015.

"We aim to make the business profitable and pay dividends. If it is adequately capitalised through equity, there is no reason that it will not make profits. Recovery will be slow, but we will only make decisions and actions based on making profits. The group will need to right-size its operations to the market we are servicing, which is tough."

Today, nothing much has changed, thanks to shareholder differences.

Where van Hoogstraten complained bitterly about the shortcomings of management, the Rudlands engaged and left little to the imagination as to who was running the show.

To all intents and purpose, the arrival of the new shareholders should have been a boon for van Hoogstraten.

No need for capital

For instance, the aged businessman told businessdigest that CFI did not require a capital raise.

"There is no need for CFI to raise capital. This is another ploy to steal more money and continue the gravy train," Rudland said.

But he says van Hoogstraten is ill informed and perhaps not knowledgeable enough to run a company as big as CFI.

"The company is completely de-capitalised. Every unit has a working capital deficit. This is clear from the financials. This, in my view, clearly shows he doesn't know how to run a business of this magnitude," Rudland said this week.

According to him, US$12 million is needed to capitalise the group, split as US$3 million (Farm & City, US$5 million in Agrifoods, US$3 million for Victoria Foods and US$1 million for Glenara Estates.

He says more funding would be needed after two years as the business grows.

According to CFI's interim results to March 2017, the company has current loans amounting to US$3,5 million and a US$1,8 million overdraft.

The company paid US$490 153 in finance charges, eating into the company's bottom line.

CFI had a gross profit margin of 6% in the same period. The company had cash and cash equivalents amounting to US$200 000.

A case for raising capital

With the adoption of the United States dollar in 2009 and the subsequent end of hyperinflation, which had decimated value for both individuals and businesses, the need for capital was well pronounced.

As a result, a number of ZSE companies went back to shareholders to raise working capital. Starafrica, African Sun, OK Zimbabwe, ART Corporation, NMB Holdings, RioZim Ltd are some of the listed companies that have come to the market with rights issues.

Yet six years later, CFI has not been recapitalised.

"CFI was debt-free at dollarisation and six years later was almost insolvent due entirely to the corruption and mismanagement of the former board and senior management," he said this week.

According to van Hoogstraten, the company will not go into liquidation.

Three of the company's operations - Suncrest, Victoria Foods and Agrifoods - are under judicial management and in need of capital and owing several millions of dollars to various creditors.

Only Farm & City and Glenara Estates are profitable at the moment.

"Who has suggested that the company should go into liquidation? The company is now almost debt-free. With the cancellation of the Langford Estates fraud, it will have an additional US$20 million equity," he said. "Messina has already, more than once, confirmed to the board that it will make trade finance for Farm & City and Agrifoods, up to US$6 million, available to the Company at 8% per annum interest."

His claims have not been verified by people on the board. With the arrival of the youthful Rudlands, among Zimbabwe's foremost value investors, it seemed the wheels had started turning at CFI.

In August 2015, CFI announced a US$20 million capital raise split between a US$10 million rights issue and US$10 million debt financing. At last, it seemed the company, a former blue chip and an investors' favourite that could be relied on for strong earnings and dividends, would be turned around at last.

In an interview at the time, Rudland had expressed both optimism and a healthy dose of scepticism, hinting not all shareholders were pulling in the same direction.

"Yes definitely - no doubt, management is brilliant, systems are good, products are good, quality is great, they are only hamstrung by working capital, remember since dollarisation this group has not been capitalised by a single shareholder, they have had to survive on borrowings to fund operations, which is unsustainable. Any company, no matter how strong, would have eventually failed," Rudland said at the time.

On whether other shareholders would follow their rights, he said some foreign shareholders, a reference to van Hoogstraten, a British citizen, had other ideas. The Rudlands were born and bred in Zimbabwe and founded their first transport company, Pioneer Transport, in 1995 before a listing a few years later and a takeover of Unifreight in the last couple years.

"We hope they are (following their rights), but we are dealing with a foreign shareholder who has other ambitions for the company and does not share the views of the local shareholders who want the company to perform and succeed and create jobs and add to the fiscus of the country," Rudland said.

But the capital raise was not to be.

At an AGM, which among other things sought to raise the borrowing limit of CFI to US$20 million, van Hoogstraten told journalists he had stopped the meeting as he left the venue.

The then chairman Simplicious Chihambakwe played down the incident, claiming due notice had not been given to all shareholders as required by the ZSE.

No stranger to controversy

Although the market sometimes discounts van Hoogstraten as a rabble-rouser after many of his corporate fights, the battle had just begun. Van Hoogstraten, who claims to be good friends with President Robert Mugabe, is no stranger to controversy.

By and large, the AGM stunt officially marked the beginning of shareholder problems at CFI amid feelings van Hoogstraten did not have the funds to follow his share of the rights issue.

Rudland said while van Hoogstraten did have the money to recapitalise and follow his rights, he seems uninterested in Zimbabwe investments.

"I think he has the money, but did not want to invest in Zimbabwe. He seems interested in looting and breaking as evidenced by all his other investments," he said.

In an interview in Harare in December 2015, van Hoogstraten told businessdigest he did not permit the rights issue to go ahead because Rudland was trying to commit fraud, a charge the Rudlands dismiss.

"I didn't fail to follow my rights. It was not a case of me failing to raise my share of the rights issue. We didn't want them repeating what they did at ZimRre Holdings. NMB pretended to be the underwriter of the ZHL rights issue. Well, at CFI they can't do that without 75% special resolution," van Hoogstraten said.

That was almost two years ago. Nothing fundamental has happened to change the fortunes of the company.

Since then, things have gotten worse.

The company has not made a profit since 2012. Revenues have come down from a high of US$92 million in FY12.

The company's book value continues to shrink. In the interim to March, the company was worth US$36 million from US$47 million in the same period last year.

Now, van Hoogstraten wants a deal that saw the group dispose of its Langford Estates to Fidelity Life Assurance after share
- the independent