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Econet rights issue to help company invest in network upgrade, analysts say

ECONET Wireless Zimbabwe’s plan to raise US$30.3 million through a rights issue will, besides paying debentures that matured in April 2023, free the company’s cashflows and allow it to focus on improving its network infrastructure, analysts have said.

The listed telecommunication and technology company issued five-year debentures in March 2017 that matured in April 2023, as part of a US$130 million capital raise to pay external creditors.

In a circular to shareholders last month, Econet said while it was generating enough funds to pay for the debentures, the company was also in dire need of foreign currency to finance the upgrade of its “network infrastructure and technology”, hence the need for a rights issue.

Economic analyst Sylvia Mutema said the proposed rights issue will free Econet’s cashflows and allow the company to focus on improving its network infrastructure, which has not been upgraded to the extend necessary in the past few years, due to foreign currency challenges in the business operating environment.

“For Zimbabwe to be part of the digital economy, individuals, businesses and communities need access to stable and reliable connectivity. As such, it makes sense for Econet to aiming to invest most of the funds it is generating (from the rights issue) into its network upgrade and expansion,” she said.

The country’s telecommunications industry has been struggling to meet growing consumer demand due to foreign currency shortages that are hampering operators’ ability to implement much needed network upgrades, expansion and even basic maintenance that requires imported spare parts.

Other analysts say the rights issue, which affords existing shareholders with an opportunity to purchase additional new shares from the company at a prescribed price on a stated future date, creates a win-win situation for both the company and its shareholders.

Econet shareholders are being afforded the option to subscribe for the rights offer shares in hard currency or using the Zimbabwe dollar-denominated debentures that they hold. The price of the debentures at the redemption date is US$0.06252 per debenture held in terms of the debenture register at the record date.

Econet major shareholders have already committed to follow their rights, leaving an sum of approximately US$13 million to be raised from the rest of other shareholders holding the debentures.

“To provide certainty regarding the outcome of the rights offer, TN Asset Management (Private) Limited has entered into an underwriting agreement with the company (“underwriting agreement”) to underwrite the US$13 million,” Econet said in the circular.

The company indicated that any debentures that will mature prior to the closure of the rights offer may be presented to Econet for settlement by the underwriter.

“The debenture holders who choose to wait for the closure of the rights offer shall be paid interest at the rate that applies to the debentures from the maturity date to the date of payment,” the circular said.

Investment analyst Sydney Mapuranga said Econet’s decision to raise new capital through a rights issue was the best decision under the current environment, where foreign currency is scarce.

“A rights issue can be seen as a sign of confidence by the company’s management that it has a solid plan for growth and is confident in its future prospects. This can increase investor confidence and attract new investors, which may result in an increase in the market share price,” he said.

The Bulawayo-based analyst said it goes without saying that the rights issue is the most secure way for Econet to raise capital without any simultaneous increase in debt.

“By opting to use the funds raised through the rights issue to pay off debt, Econet can improve its financial health and creditworthiness. This can result in a positive impact on its share price,” said Mapuranga.

Tafara Mtutu, a research analyst at Morgan & Co, said Econet shareholders who opt to follow through with the rights issue will significantly benefit in the medium to long term.

“We opine that the business will likely resume dividends after redeeming these debentures because of a welcome combination of a lower interest burden and growing US dollar sales in the short to medium-term, and this will complement the anticipated capital gains from share price appreciation,” he said.