Govt set to take over Cottco

via Govt set to take over Cottco | The Herald September 1, 2015 by Happiness Zengeni and Martin Kadzere

Government is set to take over the majority shareholding in Cottco Holdings through a debt-equity swap, sources familiar with the scheme said. The scheme will allow the conversion of high interest debt of about $56 million plus using bad debt-buying unit Zamco, to lower interest Treasury Bills, thus easing the debt burden which has been straining operations of the company.

The Government, through the National Social Security Authority already holds about 22 percent in the firm. Cottco applied for provisional judicial management in November last year but suspended the move after the company and creditors, mainly banks, agreed for a scheme which would have resulted in debt-equity swap.

“The plan is for the Government to assume Cottco’s debt and become majority shareholder in the company,” said one source. “Being the majority shareholders, Government will recapitalise the business.”

No official comment could be obtained from Cottco by the time of going to print yesterday. In the full year to March, the company posted a $30 million loss from $15 million in the prior year.

However, the prior period result included a $37 million gain on disposal of investments, which profit was in accounting, but not real cash profit.

As such, in real terms the company incurred another huge loss in the prior period. The company literally has no shareholder value to speak of and is now primarily debt funded. Problems for Cottco have dire consequences not just for its shareholders, but for the nation at large.

In 2014 /15 season, cotton production declined to its lowest level in three seasons due to a reduction in inputs support to farmers resulting from speculation of poor industry compliance on side-marketing.

Output fell 7 percent to 135 000 tonnes from 145 000 in the preceding season.

Besides low input support to farmers, production was negatively affected by changes in the rainfall patterns while many farmers also shifted from cotton farming in preference of better paying cash crops such as tobacco.

In his State of the Nation address last Tuesday, President Mugabe said Government will revive Cottco to restore viability of the industry. He said the Government will ensure that the industry provides a livelihood for over 300 000 families and create more jobs.

“Government will resuscitate Cottco in order to restore viability in cotton farming in Zimbabwe,” said President Mugabe.

“Government will ensure that cotton, which is largely grown by small-holder farmers can once more provide a livelihood for over 300 000 households and create jobs for many in the textile industry.

“The same success story that we witnessed in the production of tobacco in the past few years must now happen in cotton.”

Analysts say the fundamental challenges in Zimbabwe’s cotton industry are poor grower viability, side-marketing and poor vertical integration. The approaches that have been tried since the privatisation of CMB in 1994 include liberalisation of the sector and the entry of new players as well as the promulgation of a new legal framework to control side-marketing.

The enforcement of this legal framework has proved to be problematic due to a myriad of challenges.