TM Supermarkets by absences


									                                     $ 75,000,000

                    International Private Placement


         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-

                                     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

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 9 and 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.


        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 Rand1 (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.

    Rand in the monetary unit of the Republic of South Africa

The Department Stores

       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.


         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.

Clicks & Diskom Stores.

        In October 1995, the company concluded franchise agreements with the South African
based Clicks Group for exclusive franchise of the Clicks & Diskom store concept s in Zimbabwe.
Both these brands have been very successful in South Africa and are well known in Zimbabwe.
Both these stores sell health, home and beauty lifestyle products. Clicks caters for the middle to
upper income groups and carries a greater number of product lines than Diskom, which is
positioned as a mass retail chain, targeting middle to lower end income groups. One Clicks store
was opened in Harare, and intends to open 3 more Clicks and 3 Diskom stores by 31 March 1997.
The company intends opening a further 2 Clicks and 10 Diskom stores. The average store will
have 400 to 450 square meters of selling space in the case of Clicks stores, or approximately 300

square meters in the case of Diskom stores. Benefits from the franchise agreements include the
ability to source products through Clicks in South Africa (which has considerable purchasing
power) and accessing expertise from Clicks.


        The company also entered into an exclusive franchise agreement with the South African-
based LeisureNet Group for Bulldog, Black Steer, Flame Diners and Max Frango brand of
restaurants and fast-food outlets in Zimbabwe. Three of the Bulldog pubs and restaurants will be
located in the company‟s department stores, but the remainder will be located separately. Three
restaurants and three pubs are already open, and it is anticipated that a further 21 outlets will be
opened by 31 March 1999.

                                     The Private Placement

         Meikles Africa Limited retained investment bankers from ING Barings in London to
arrange the private placement with international emerging market investors. The shareholders of
Meikles Africa had sanctioned the issue of 48 million new shares in the company in an
international offering for an amount of approximately US$ 75 million. In addition, the
shareholders had granted conversion options to the holders of Z$ 100 million (approximately US$
10 million) TMC debentures in exchange for approximately 6.2 million new shares of the
company, to be issued on the same date and at the same price as the allotment of new shares
under the international offering. Assuming full conversion of the shares underlying the TMC
debentures, the new shares placed in the international offering would constitute approximately
32.5% of the issued share capital of Meikles Africa Limited. The privately placed shares would
trade publicly on the London Stock and the Zimbabwe Stock Exchanges under the ticker symbol,
MAL. Exhibit 14 illustrates the ownership structure of Meikles Africa Limited assuming the
placement of the international shares and the full conversion into common stock of the TMC

       This private placement, if successful, would be the single, largest equity raising by a
Zimbabwean firm. The gross issue proceeds (translated into Zimbabwe currency) from this
placement would be approximately equal to the total amount of new capital raised from the
immediately preceding 16 public offerings of new securities on the Zimbabwe Stock Exchange
between 1991 and September 1996.

                                         Use of Proceeds

        It is anticipated that the proceeds from the private placement of approximately Z$765
million will be utilized in the company for the following purposes:

TM Supermarkets Business:

        Financing the geographic and acquisitive growth of TM Supermarkets within Zimbabwe,
        central and southern Africa in joint initiatives with Pick „N‟ Pay and other strategic
        partners. This includes the opening of 12 new stores by 31 March 1999 and the
        refurbishment of existing stores in addition to the acquisition of South African Rand 30

       million equivalent of shares in Pick „ N‟ Pay (the latter investment is conditional upon
       approval from the exchange control authorities of the Reserve Bank of Zimbabwe).

Hotel Division:

       Financing part of the equity in a proposed new 5 star hotel in Harare. The hotel will
       focus principally on the corporate market, but will also aim to attract up-market tourists
       and conference guests. The projected capital cost of this hotel development is expected
       to be approximately Z$ 500 million and will be financed from third party sources.

Department Stores Division:

       Financing the refurbishment of the department stores to ensure their competitiveness. It
       is also intended to apply part of the proceeds from the offering in financing all of the
       short term and part of the long term credit provided to customers in the department stores,
       which is currently undertaken by arrangements with third party financiers. As at 31
       March 1996, the short term debtors book relating to this activity, financed by third
       parties, amounted to Z$ 40 million and long term debtors book, financed by third parties,
       amounted to Z$ 92 million. In addition, it is intended to increase the number of
       franchised outlets under the Clicks & Diskom brands from the present 2 to approximately
       50 by 31 March 1999, at a projected capital cost of Z$ 100 million.


The upcoming investment committee meeting would be the real clincher if this deal would go
forward. Raymond would need to convince his colleagues on several key considerations. These
included the reasons for investing in Zimbabwe and in Meikles Africa Limited in particular.
Raymond would have to articulate the risks inherent in this investment at the sovereign and
corporate level and understand how these risks could be mitigated. His decisions on these base
parameters would influence his view on the appropriate cost of capital for the country and the
company and impact the valuation and pricing of the offering.


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