October 20, 2020

Will proposed sale of entire share capital of Dawn Properties, by African Sun, benefit shareholders?

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Mazvita Samuriwo

The Securities and Exchange Commission has expressed concern over African Sun Limited’s intention to purchase the entire share capital of Dawn Properties Limited and has begun investigations into the issue.

If the agreement is entered into, the shares will be sold at a price that is significantly lower than the prevailing market rate and African Sun will acquire 100% ownership of Dawn Properties.

Critics have questioned the move as selling shares below market value impacts the value of shares, usually resulting in a drop of share price and dividends to be paid on each share.

A circular to shareholders by African Sun highlights vast benefits. These include but are not limited to:

 A Dawn shareholder who accepts the Offer will receive 1 share in African Sun Limited for every 3.988075946 Dawn shares held. A shareholder has the option to refuse the offer if they believe it is not a good one;  

 Dawn’s property portfolio has consistently performed below expectation with its yields averaging below 3%. Thus the opportunity to have exposure in African Sun will enhance the free cash flow yield for the shareholders of the merged entity;

 Given the consideration will be in 616,129,718 new African Sun shares, the enlarged entity will provide greater liquidity to investors;

 No rental expenses means that liquidity improves at African Sun allowing better management of working capital;

 Cost savings will be unlocked for both African Sun and Dawn as Dawn will be delisted, saving duplication of cost and enhancing a free cash flow yield for shareholders.

Regarding the price of the shares being significantly lower than market value, Batanai Matsika, Head of Research at Morgan & Co states that, “the issue was determined by African Sun’s financial Advisors, IH Advisory and then reviewed by Directors of Dawn, with the assistance of Independent Financial Advisor, Imara.”

The transaction has been described as a “merger” between the two companies in a bid to revert back to the status quo. Formerly, the two companies were a single entity where African Sun, previously known as Zim Sun, owned the majority of hotel properties it operated from.

The demerger in 2004 resulted in Dawn Properties listing separately on the Zimbabwe Stock Exchange and African Sun transferring its properties to Dawn Properties. This resulted in the creation of a landlord and tenant relationship between the companies’ in favor of African Sun.

Mr Matsika refuted that the proposed transaction is a merger. “This is because a merger is a combination of two companies into one.

Contrastingly the two companies will continue to exist but there will be a parent subsidiary relationship which does not currently exist,” he said.

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