Econet shares conversion to dilute shareholders’ equity

ECONET Wireless Zimbabwe Limited (EWZL) will reduce its shareholders’ equity by diluting their shares from its conversion offer to debenture holders to convert every 100 debentures to 93,3 new ordinary shares.

BY TATIRA ZWINOIRA

Yesterday, EWZL made an offer to debenture holders to convert 1 166 906 618 debentures into new ordinary shares subject to shareholder and regulatory approval, a move meant to increase the company’s capital.

“The offer involves the conversion of all 1 166 906 618 debentures (long-term securities) in issue, with a face value of 4,665 US cents each, into ordinary shares on the basis of 93,3 new ordinary shares for every 100 debentures held,” EWZL said in a statement.

“The shares are to be issued at a price of five US cents per share, being the issue price of the shares at the same time of the rights offer.”

EWZL said the ZSE (Zimbabwe Stock Exchange) had approved the listing of all the ordinary shares issued as a result of the conversion.

According to United States-based investing and finance education and analysis website Investopedia, when the number of shares outstanding increases, “each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable”.

What this means is that depending on the number of additional shares issued as a result of conversion, from debentures to new ordinary shares, EWZL’s shareholders’ equity value will decline as a result of stock dilution.

Such a reduction could determine whether EWZL shareholders agree to the conversion offer made by EWZL as the offer would effectively reduce their stake in the business and increase the company’s ownership.

This comes over a year after EWZL did a controversial $130 million rights offer that was seen as a way of the Econet group increasing its shares as Econet Global were the underwriters of the deal.

However, Stockbrokers’ Association of Zimbabwe vice-chairperson Arnold Dhlamini said: “What it also does for the company is that it takes away its debt obligation. So, perhaps when you are also looking at the entry price valuation of the business it also strengthens the value of the company because it takes care of debt without paying any money”.

Investopedia says dilution is a case where a company is divided into smaller pieces, meaning that current investors have a smaller portion of the overall pie that could affect the earnings per share.

“While it primarily affects company ownership, dilution also reduces the value of existing shares by reducing the stock’s earnings per share,”
Investopedia warns.

Usually, share dilution happens any time a company needs additional capital, seeing as new shares are issued on the public markets.

Econet is trying to leverage off its position as the largest company by market capitalisation on the ZSE, which stood at $6 140 444 663 as of yesterday afternoon.

By having more shares on the market, the increased trading from uncertainty in the markets on the ZSE that saw its market capitalisation cross $20 billion a few weeks back would result in increased turnover for Econet, therefore, capital.

The conversion offer opened at 9am yesterday and will close at 4pm on November 22, 2018.

Currently, the Econet group is in the process of unbundling its financial technology business into the newly formed subsidiary Cassava SmarTech, which will remove 39% of its revenue.

Analysts say increasing the equity of EWZL would militate against the potential loss in revenue from the main business.