DealMakers AFRICA Q3 2019
Successful implementation of Mozambique’s largest equity market transaction
by Joel Rodrigues and Miguel Alves
In July 2019, Hidroeléctrica de Cahora Bassa, S.A. (HCB), concluded the sale of 4% of its share capital through an Initial Public Offering (IPO) on the Mozambique Stock Exchange – making it the largest equity capital markets transaction to ever occur in Mozambique at that time, amounting to MZN3.3 billion (~ $50 million).
HCB is the concessionaire company responsible for exploring the Cahora Bassa dam, one of the largest dams in Africa, with an energy generation capacity of 2,075 MW. The company was established in 1975, through a consortium between the Mozambican State and the Portuguese State. It sells energy under long-term power purchase agreements (PPAs), mostly to South African utility Eskom and the Mozambican EDM and, to a smaller extent, to ZESA in Zimbabwe.
The transaction carried a high level of importance, not simply because the decision to sell was announced in November 2017 by the President of Mozambique himself, on the occasion of the 10th anniversary of the Mozambique State taking majority control of the Company from the Portuguese State, but also because HCB is frequently referred to as Mozambique’s crown jewel and a source of great pride as a financially healthy State-owned company and a large contributor to the country’s finances.
The objectives of the IPO were mainly twofold: i) to enable every Mozambican individual, company or institution to participate in the capital of such a flagship company, and ii) to help the development of a still incipient and illiquid capital market in Mozambique. Success would then not only be measured by placement capacity, but also, through reach and inclusion i.e. the capacity to include individual shareholders from different parts of the country and different levels of income.
Due to the characteristics of the market and the complexity of the transaction, the IPO was a highly challenging task from the beginning, for several reasons:
• Mozambique remains mostly a rural and low-income country with very low levels of financial literacy. Less than a third of adults hold bank accounts, while most branches are located in urban areas and to the south. However, the majority of the population is located in the centre and north, in regions which present very low levels of banked population (on average 16%);
• The market had never been tested for a large-scale public offering and the few existing listed equities in Mozambique are highly illiquid. There was significant risk of attracting relevant demand, particularly in a period when deposits and fixed income securities provided double-digit returns;
• A public offering of this size and complexity was new for every stakeholder involved, and would require significant time and resources from the company, the players in the financial system and the regulators;
• The offer was to be restricted to Mozambican nationals only (both individuals and corporates), which brought significant “know your customer” (KYC) and compliance challenges to banks;
• The distribution strategy had to underpin the lack of banks’ branch coverage in the country, but also taking into account anti-money laundering (AML) concerns and regulations;
• The concession of the infrastructure was expiring in 2032, and there was the need to extend the contract to make the transaction more attractive to prospective investors.
BCI and BIG, two local Mozambican banks acted as Global Coordinators (GCs) for the transaction, supporting the company throughout the process, which took almost 12 months of preparation. The timing of the offer was also very challenging; it occurred between two election processes in the country and just a few months after Cyclone Idai struck Mozambique – arguably the largest natural disaster in Africa, in the 21st century.
The company was able to negotiate a 15-year extension of the concession prior to the transaction, and created a new class of shares which were to be admitted on the stock exchange, and could only be traded by Mozambican investors – thus solving the eligibility criteria.
Taking into account the inclusion objectives of the IPO, the structure was designed in such a way that preference would be given to orders placed by individuals in the retail sector, and lastly to corporate and institutional investors. A specific segment was created to allow low income investors to invest from as little as MZN60 ($1), exempt from any bank commissions or stock exchange fees.
The uniqueness of the transaction, and the characteristics of the country, required the development of an unparalleled marketing strategy which included financial literacy campaigns, widespread advertisement through traditional media (TV, print, radio – including local languages) and social media, the development of a micro-website for the IPO and a dedicated and free call centre. A placement syndicate of 15 banks was also arranged, ensuring market share coverage of more than 98% of the country’s customer deposits.
To reach the non-banked and people living in areas not covered by banks’ branches, innovative subscription channels were developed, which included a mobile app and a USSD trading platform, inter-operating not only with the banking platform but also with mobile money schemes, enabling any individual to subscribe for shares from any mobile phone holding a registered Mozambican mobile number, without internet data or use of airtime, and without a bank account.
The results of the IPO were very successful, with demand higher than anticipated at 2.2x the initial offer size. A total of 19,210 orders were received from 16,787 investors, of which 99.2% were individual investors. The objectives of reach and inclusion were successfully achieved with orders received from all provinces in Mozambique, and over 92% of districts. Orders received from the innovative remote channels amounted to 36%. The impact on the stock exchange was also significant as the number of registered investors on the exchange almost tripled from less than 8,000 initially, to approximately 23,000 after the transaction.
Rodrigues is CEO of Banco BiG Moçambique, S.A. and Alves is an Executive Board Member – Banco Comercial e de Investimentos, S.A.