Cottco to earn $50m

Published: 01 December 2013

The Cotton Company of Zimbabwe will earn $50 million from the imminent unbundling of Aico Ltd, its parent company, with the amount set to be channelled towards recapitalisation.

Cottco managing director Mr David Machingaidze told The Sunday Mail Business last week that the funds will be used to retire debt, improve efficiency and competitiveness and help stem losses that have been realised in recent years.

He noted that $30 million would come from the disposal of a portion of Aico's 49 percent stake in SeedCo, while $15 million would be from an Aico rights issue and the remaining from liquidation of assets.

"For the past two years, Cottco has made losses. The $50 million will help bridge the gap caused by issues such as side marketing, which have seriously affected the company," said Mr Machingaidze during an interview on the sidelines of a stakeholders' meeting between Cottco and legislators from cotton- producing communities.

"We have a debt burden and it affects our competitiveness. The money has come at a good time; without the capital injection, it will be very difficult to fund operations like input schemes."

Aico intends to spin off Olivine Industries, Cottco and SeedCo and shelve the holding company model, hardly five years after consolidating operations. The group is citing operational challenges, which have greatly affected profitability, as the major reason for restructuring.

The de-merged entities are expected to list separately on the Zimbabwe Stock Exchange.

In the SeedCo deal, Aico is selling $20,4 million worth of stock to Vilmorin & Cie, a French seed maker. This is part of the money that will be extended to Cottco, said Mr Machingaidze, and will be topped by other asset disposals on the local market.

He said the company was also looking at opportunities for increasing value addition in the cotton industry. A seed crusher, for instance, would ensure Cottco produce and sell seed oil and cotton cake, creating extra revenue for the firm.

Cottco has been riddled with problems stemming from declining cotton production, with farmers shunning the white gold owing to low producer prices.

As a result, farmers ended up selling their produce to other merchants, oblivious of the contractual obligations entered into with Cottco. Aico's financials for the year ended March 31, 2013 show that although the cotton business recorded a 45 percent increase in intake volumes of 150 000 tonnes, and a 42 percent growth in sales volumes, revenues dropped 20 percent owing to international lint prices which plummeted from US240c to US80c a pound.

"Below par inputs scheme recoveries resulted in the raising of $12 million of impairments charges against the income statement. This business posted a loss of $7,8 million as a result.

"Improvements in input scheme recoveries and on farm yields remain a focus area as does the elimination of core debt which is costing this business approximately $6 million in finance costs a year," said Aico.

The group added that although cost reduction measures were being fruitful, the benefits were being offset by a high interest bill at $16,8 million against the previous year's $18,5 million.

Aico Group was formed in 2008, creating the largest conglomerate in agro-processing industry, with Cottco, Olivine and SeedCo being its subsidiaries.

But with liquidity crisis that followed dollarisation in 2009, Aico, just like many local firms, struggled to recapitalise.

Most businesses resorted to borrowing short-term money with high interest rates.

Last year, Aico announced its intentions to unbundle, a process in which a number of transactions would take place.

Among them is the disposal of its 51 percent stake in Olivine and the SeedCo equity deal.

- Sunday mail

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