Zambeef and ZamSugar: Chronicles of Financing Deals

In today’s challenging and diverse Marco environment, the modern Chief Financial Officer (CFO) or Finance Manager (FM) of a company must be knowledgeable in some of the most complex instruments at his his/her disposal in order to meet the demands of his/her company’s financing and investment needs. Corporate finance is a key activity in the management and success of a commercial enterprise and the CFO / FM is its custodian. Their task is twofold: look after their company’s investment story and ensure that it’s adequately financed. How difficult can that be? They are only long term decisions, by which we mean that the cash flow implications of the decisions last for at least a year, right? It is more complex than you know.

When a company looks at growing its revenue stream, it is faced with two choices: either to grow organically or go to market and purchase a company that already has a revenue stream it can add on to its own. The former and latter preposition is what Zambeef and ZamSugar (respectively) ventured into when you look at their significant transactions for 2016.

Rule Number 1: Accept All Projects with a Positive NPV

In ZamSugar’s case, using a combination of its own liquid assets ($20m) and funds from a syndicated financing agreement ($60m) they were able to raise the $80m they needed to invest in the Product Alignment and Refinery Project (PAAR) which was officially commissioned by His Excellency, the President of the Republic of Zambia, Mr Edgar Chagwa Lungu, at the Mazabuka-based Nakambala factory on 6^th July 2016. At the onset, the CFO is given the mandate to justify such an investment. There are many methods that are available to his team that may include Net Present Value (NPV), Internal Rate of Return (IRR), Hurdle Rate or Payback. NPV and IRR are the two most popular among CFOs. But what is quintessential about these methods is the consideration of the time value of money (A kwacha today is worth more than a kwacha tomorrow). This underpins their justification to the board that the investment the company makes will not only grow the company’s revenues but also increase the firm’s value in the long run. In short, the investment is a strategic decision with long term consequences.

Rule Number 2: Always have the shareholders’ interests in mind

In Zambeef’s case, they used a fantastic instrument called put options granted to Rainbow Farms Investments Proprietary Limited in 2013 as part of the Zam Chick Limited and Zamhatch Limited joint ventures entered into with RCL Foods. A put option (or simply put) is an option to sell assets at an agreed price on or before a particular date. What makes this deal even more exciting for a CFO is that he/she now has to present a case to the board where issues of how financing of this “put” shall be made. In their case, Zambeef had the option of dilution of shares by raising money through share offers which would have upset shareholders. In this particular case, the put was financed using cash from part of the proceeds from the US$65 million investment from CDC Group PLC. Not only does this deal preserve shareholder value, it ensures that that the company is able to continue financing its operations without being heavily dented by a large outlay of cash. Prudence is a virtual possessed by the most talented of CFOs.