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The Heinz transaction unpacked



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By Mutumwa Mawere

ON MONDAY, September 3, it was disclosed that H.J. Heinz Co., a company domiciled in the USA, had sold its 51% in Olivine Industries, a company incorporated under the laws of Zimbabwe in which the government of Zimbabwe holds the remaining 49% shareholding.

The motivation, structure and financing of the transaction raises more questions that answers. The timing of the deal and its motivation clearly raises a number of issues. While the real motivation of the price freeze may never be known, its causal link with the indigenisation and empowerment objectives of the government of Zimbabwe needs to be interrogated.

Was the price freeze used as a preemptive strike for the nationalisation of private assets? To the extent that Olivine Industries has interests in the manufacturing of fats, edible oils, and soaps, was Heinz forced out or does the transaction expose the hypocrisy of multinational corporations in their dealings with the government of Zimbabwe?

The spokesman of Heinz, Michael Mullen, had this to say about the transaction: “This sale is another step in the company's global strategy to drive profitable growth and innovation in three core categories where Heinz has strong brands. The decision to sell the business was only taken after a comprehensive review of all strategic options."

Was the transaction really motivated by the company’s desire to drive profitable growth and innovation or was it a response to state pressure? When did Heinz decide that an investment in Zimbabwe no longer fitted into its strategic thrust?
It was reported that Heinz sold its interests to Cottco, a company incorporated under the laws of Zimbabwe. What is interesting is that Cottco was described as a government controlled company.

However, Cottco is a listed company whose shareholding is a matter of public record. The largest shareholder of Cottco is NSSA with a combined stake of 21.31% followed by Old Mutual Life with an equity stake of 17.47%. The top ten shareholders of Cottco are as listed below:

SHAREHOLDER
% HELD
NSSA
18.29
Old Mutual Life
17.47
Barclay Nominees
8.62
Burket Associates
7.76
Remo Nominees
7.38
Caperal Limited
5.23
NSSA
3.02
Datvest Nominees
2.16
Old Mutual Zimbabwe
1.91
Dinnigan Investments
1.89
TOTAL
73.73

It is evident from the above that the government of Zimbabwe is not listed as a shareholder and yet it was reported that Cottco is a government-controlled company. What would be the motivation for both Heinz and Cottco to misrepresent the true nature of the transaction and the parties involved?

There are many people who naively assume that NSSA is a proxy for the government of Zimbabwe. NSSA is a body corporate that has a separate and distinct existence from the government of Zimbabwe. The institution is not funded by the government but by member contributors. It has its own rights as set out in the Act of Parliament that established it.

Notwithstanding, many people including representatives of the government of Zimbabwe cannot make the legal distinction between the government of Zimbabwe and NSSA in as much as they cannot make the difference between a company and its shareholders.

If Cottco is a private company as shown above, why was it used as an instrument for acquiring shares in Olivine? In the Herald, it was reported that the Industrial Development Corporation was the real purchaser, and Cottco was merely used as an agent.

George Charamba, the Permanent Secretary in the Department of Information, has also commented that the negotiations for the disposal by Heinz of its shareholding were held between the government of Zimbabwe and the American company.

To the extent that the government is a shareholder in Olivine, it must have a pre-emptive right on the shares previously held by Heinz. If this is the case, can such rights be assigned to a third party? It is not clear how or why Cottco was selected to be a party in the transaction?

According to Cottco, the motivation of the transaction was to add critical mass to the company as well as allowing for diversification. If this was the motivation, why would the Herald suggest otherwise? What was the legal mechanism used to transfer any rights the government may have had on the Olivine shares to Cottco?

If the government has no controlling shareholding in Cottco, what is the connection between the two parties? The only possible connection is that Sylvester Nguni, who is now a minister in the government, was formerly a CEO of the company and is a shareholder. This leads to another question whether he was involved in the transaction, and if so, what if any does he stand to benefit personally?

While Cottco and Heinz maintain that there was no government involvement, it was reported in the Herald that the deal was the first in a much publicised program by the government to take over white-controlled (foreign) businesses.

The executives of both companies have represented that the deal was negotiated months before plans were announced by President Robert Mugabe earlier this year to force all businesses to relinquish 51 percent of their ownership to indigenous Zimbabweans.

Why would Heinz be party to an opaque deal? The true nature of a deal involving the externalisation of US$6.8 million by a Zimbabwean private company at a time when the country is facing a critical shortage of foreign currency raises a number of questions. How was the shareholding valued? Who authorised the externalisation of US$6.8 million by Cottco? If Cottco is the true owner of the shares, how many other companies were offered the same opportunity to assume the rights belonging to the government for private benefit? If Cottco was an agent of the government, what was the exchange rate used to purchase the US$6.8 million used to pay Heinz?

If the deal is part of the indigenisation program, will all foreign companies be treated the same way? Was the deal structure influenced in any way by the sanctions regime? What, if any, are the implications for Heinz to admit that the true purchaser of the shares was the government of Zimbabwe? If Heinz can succumb to pressure and companies like Cottco are used as instruments for nationalisation, what are the implications on the integrity of the indigenisation program?

It has also been reported that Cottco was used as an agent for the government because the government is broke. If the government is indeed broke, what are the implications of this on the indigenisation program? To what extent does the deal undermine the rule of law? It is obvious that Heinz is a beneficiary from the transaction and is unlikely to make any comment on the state of play in Zimbabwe about the rule of law.

To the extent that it is more expensive for any local company to be critical of government actions that undermine the rule of law, the transaction removes from Zimbabwe any third party voice that could influence the direction of change. If a company like Cottco can easily be converted into an instrument of the government, what prospect exists for such a company being an agent for change of policy in Zimbabwe?

In June 2006, Heinz wrote down its investment in Zimbabwe citing the "continuing uncertainty regarding the stability of the currency and economic conditions in the country," as the cause. Nothing has changed on the economic front and yet Cottco surprisingly has seen it fit to pay US$6.8 million for assets that have no value because of economic policies that are not business friendly.

Cottco’s operations are underpinned by poor black farmers whose standard of living has been eroded by hyperinflation. Although Cottco has done well financially, its core stakeholders continue to be disadvantaged. The shareholders of Cottco may not agree on the use of their money to buy shares in a company that the government believes should perform the role of a salvation army i.e. selling products below cost.

Equally, the cotton farmers may not necessarily agree that their sweat should be transferred into shares in a company like Olivine. If the US$6.8 million was used to support the cotton farmers or pay out to shareholders, it could make more sense for them.

Mawere is a New Zimbabwe.com columnist
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