‘Condition No.5’ sends CEC stocks in 12% loss as CDC bid fails

  • ZESCO stance on bulk supply agreement renegotiation in the best interests of Zambia
  • CEC equities sell-off to persist until equilibrium pre CDC offer price is attained 

STOCKS for Lusaka Securities Exchange-listed Copperbelt Energy Corporation (CEC) shaved 12% market value as markets priced in a failed Commonwealth Development Corporation majority stake takeover bid. Following stock exchange news report, the CDC-AP Moller takeover bid of the energy and power distributor reached a deadlock and lapsed in July. The show-stopper for the transaction was a stalemate between the state power utility ZESCO and CDC–AP Moller conditionality to renegotiate the 20 year bulk energy supply agreement, which ZESCO refuted and was only open to discussion six months before expiry in 2020. This was ‘condition number 5’ in the negotiating terms and conditions for the takeover.

The offer opened on February, 20 with market price of CEC scrip rallying over 43% to K2.1 a share from K1.42. CDC had offered to buy all issued ordinary shares of the power distributor. The offer period was extended twice to July as ‘condition 5’ dragged negotiations, making speculators weary of the wait, fueling an asset sell-off that has sent stock prices in a 12% loss position to date as uncertainty became more and more certain with extended offer periods.

Some schools of thought have commended ZESCO for its stance on ‘condition 5’ saying it was in the best interests of the country. Cited was that bulk supply agreements for two decades have cost the power utility revenues forgone in mispriced contracts. Twenty years is too long a period for pricing fundamentals to change and as such ZESCO was tactful in refusing to renew the bulk agreement for another 20 years at unchanged pricing. This decision was also seen as one skewed towards outcome the AfDB-funded cost of service study which would allow the utility to both price future contracts at market reflective tariffs and have appropriate flexibility clauses. It is however unknown how much the company has hemorrhaged from the current agreement that expires in 2020. However one certainty is that it is the reason for the disagreements between the mines and CEC last year disputing tariff increases. Energy permanent secretary Brigadier Emeldah Chola said at an energy conference this year that Zambia would emulate other SADC member states in implementing cost reflective tariffs by December 2018. Two tough learnings for parastatals in the copper producing nation have been:- mispricing and incorrectly or under drafting of long dated contracts, relating to strategic assets, which leave little room for flexibility causing locals to be on the receiving end of hard bargains.

From a corporate finance perspective, delaying and renegotiating the bulk supply agreement gives an opportunity for the power utility to reprice its agreement at profitable rates. ZESCO is, after all, a strategic asset to the nation.

“The state dodged a bullet successfully as locking in a 20-year bulk supply agreement (BSA) would not have made economic sense at current non-cost reflective tariffs. Very smart move, a chief analyst for the Business Times said in a research note.

“The business of pricing under water is the key cause of operational inefficiency in most parastatals.”

According to technical analysis, CEC stocks are 33% overpriced as they still trade at K1.87 a share from K1.42 levels pre-CDC offer. With the observed sell-off in the energy distributor’s assets, we forecast that there will be pressure to harvest capital gains which will force equilibrium price back to pre-offer levels.

CEC Plc shares as at 16.26 pm on the LuSE traded for K1.87 a share.

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