The Independent Board of Imara has recommended that Imara Shareholders reject the offer by FWA Financial Limited to acquire the entire issued ordinary share capital of the company that it does not already own.
The recommendation comes a month after FWA offered shareholders a cash offer consideration of P2.10 per offer share, which is 19% lower than the current share price. FWA is a financial holding company registered in Mauritius, and the company is the single largest shareholder in Imara with a 28.97% stake. In its offer, FWA has proposed to buy the remaining 71% of Imara shares which are currently not held by them. Furthermore, the offer was not a combined offer as it was made directly to shareholders, which means shareholders do not need approval to sell to FWA hence making a hostile takeover possible.
When making the offer, FWA reasoned that the offer price of P2.10 per share is attractive to shareholders, providing a liquidity event as well as representing a fair value proposition. The Mauritius based company is hoping to leverage their offer on the absence of liquidity for Imara shares on the Venture Capital Board of the BSE and meet shareholders desire for a return of the cash proceeds associated with the sale in 2015 of Imara SP Reid Proprietary Limited either through share buyback or declaration of special dividends.
FWA as the main shareholder has taken the role of the activist investor as the company appears to question certain decisions taken by Imara, furthermore the offer to buy the whole of Imara seems to stem from the concerns regarding the future operations of Imara.
FWA appears to be disappointed that the share buyback programme approved by shareholders last year October to buy back 15 million shares has not been implemented, denying shareholders capital gains accrued and also the chance to offload the hard to sell stock. Moreover, FWA said when making the offer that the potential for Imara to keep its shareholders happy through a special dividend is unlikely as the company simply doesn’t have sufficient cash reserves to finance an attractive special dividend.
FWA argues that Imara’s distributable reserves amounting to P39.2 million equates to a maximum potential dividend of P0.66 per share, approximately 31.4% of the FWA offer price. FWA’s offer to take over the whole of Imara is motivated appears to be driven by the desire to save the company from collapse as they highlighted that Imara finds itself in a tough spot.
FWA says Imara has experienced difficult trading conditions in the sub-Saharan African markets in which it is active. African economies have suffered a sharp decline in the past 18 months, driven by weak commodity prices which led to declines in currencies versus the US Dollar, difficult economic conditions, currency controls, reduced liquidity, lower share prices and reduced equity trading volumes.
Indicative of the challenges experienced by Imara is the 50% drop in the value of the flagship Imara African Opportunities Fund in US Dollar terms in the period from 30 April 2015 to 30 September 2016 as a result of the decline in African equity values and redemptions.
In the five years to 30 April 2016, Imara generated profits Attributable to Owners of the Parent in two out of the five years. Cumulative Losses Attributable to Owners of the Parent totalled BWP24.6 million in the five years to 30 April 2016. In the year to 30 April 2016 IHL reported a pre-tax loss of BWP13.38 million from continuing operations before the profit on disposal of Imara SP Reid Proprietary Limited, exchange rate gains and goodwill impairments.
FWA has also noted that Imara has high central costs for a company of its size, adding that the high central costs reflect the fixed costs associated with its listing on the Venture Capital Board of the BSE as well as fixed costs associated with the complexity of its business model.
DETERMINING THE OFFER PRICE
“In determining the Offer price, FWA has taken into account IHL’s track record, the value of IHL’s balance sheet at 30 April 2016 and IHL’s growth prospects. FWA therefore considers that the all-cash nature of the Offer allows Shareholders to realise their entire investment at a fair value given the uncertainties facing African economies and IHL at this time,” the acquiring company said.
FWA has also revealed that should it manage to buy the required shares, it intends to make an application for a delisting of Shares on the Venture Capital Board of the BSE. The reasons for de-listing include the lack of liquidity in the Botswana market for small-cap shares and thus the ability to set proper market prices becomes compromised; the limited liquidity to raise capital as a small-cap stock; management having to spend a significant amount of time to focus on investor relations and compliance with the BSE Listing Requirements and ongoing fixed costs associated with BSE Listing Requirements compliance and regulatory oversight.
While it appeared that FWA had made a convincing case for the takeover, the independent board has not only rejected the offer price but also quashed some of FWA’s claims regarding the operations of Imara. The board of directors of Imara were obligated to form the Independent Board for the purpose of considering the terms and conditions of the Offer. The Independent Board, in accordance with its obligations in the Takeover Regulations, appointed KPMG as an Independent Expert to provide it with a fair and reasonable opinion regarding the fairness and reasonable of the Offer Consideration. Following receipt of that fair and reasonable opinion, the Independent Board is required to communicate the contents thereof to Shareholders, together with the Independent Board’s opinion on whether or not the Shareholders should accept the Offer.
IMARA INDEPENDENT BOARD FIGHTS BACK
“The Independent Board, taking into account the opinion of the Independent Expert that the terms and conditions of the Offer are not fair and not reasonable, has considered the Offer and is of the opinion that the Offer undervalues the Company and, on that basis, recommends that Imara Shareholders reject the Offer.”
The Independent Board considers the Offer to be an opportunistic move to take advantage of the current short-term adverse trading environment for the IHL Group and to acquire control of it cheaply. The independent board stopped short of accusing FWA of being disingenuous by using inside information to drive their agenda.
The board has revealed that while FWA is critical of the recent and current performance of the company, the management team of Imara currently comprises of four executive directors, three of whom are also directors of FWA. In an interesting twist, the independent says Imara’s board of directors has been pressing the management team, most of the members of which are now directors of the FWA, for its promised strategy proposals, which have not been forthcoming and have delayed the implementation of various key decisions by the board of directors.
“The Independent Board considers that a conflict of interests is created when members of the management of the Company, who have not articulated a strategy to deal with the numerous issues facing the Company, form part of the Offeror, which has made the Offer at an Offer Price which the Independent Expert has confirmed undervalues the Company.”
Given the prevailing financial environments in countries where Imara operates, the short to medium term prospects of the company are uncertain and the Independent Board is unable to confirm that the business of the Company, in its current format, will be profitable on a sustainable basis, until there is an improvement in the current adverse cyclical factors affecting it.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”