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Bigger (no longer) better in business

ALMOST four years ago, then Industry minister Obert Mpofu announced that government had at last found an equity partner for Zimbabwe Iron and Steel Company (Zisco).

Among some of the highlights of the deal, the new investor –– Global Steel Holdings Ltd (GSHL) –– would invest US$400 million in the struggling steel plant.
All seemed to be  going well. Six months after allegedly making a US$400 million investment commitment, GSHL had not committed a dime towards getting  Zisco back on stream. Instead, the company had been milking the already troubled company of thousands in management fees. And then other scandals emerged: the company did not have a proven track record in the steel business and had run its own companies into the ground in Nigeria. But even as these revelations came to light, the company still had sympathisers in government. 
Government, in its desperation for an investor, had partnered GSHL, the small boys in the steel business. From there, other possible suitors –– big, small, old and new names in the steel game –– have been lining up to buy a stake in Zisco. In 2008, New Reclamation, government’s partners in Marange diamonds, had joined the race. Even the world’s largest steel company — ArcelorMittal –– joined the race, only to take a back seat after President Robert Mugabe said the company was too big for his liking. Now government, according to reports from state-controlled newspapers, is no longer keen on the the notion that bigger is better, fearing total absorption. Last week, the Herald reported that government has engaged the Zisco board to consider possible partners “among the six initial bidders keen to acquire up to 60% of the State’s shareholding in the steel company”.
The race for the acquisition of a stake was said to have been reopened after the “presidency threw out bids of the two investors that had been short-listed on grounds that the conglomerates were too big for investment into the steel maker”. Among some of the top bidders are ArcelorMittal and Jindhal Steel and Power of India. ArcelorMittal  South Africa is a subsidiary of the world’s largest steel manufacturer ArcelorMittal Group with a market capitalisation in excess of US$35 billion. ArcelorMittal is the world’s largest steel maker with presence in more than 60 countries. Its rival in the bid, Gateway Consortium is also a big player in the  game.  Jindhal Steel and Power Ltd is India’s third largest steel maker, by tonnage, with an annual turnover of about US$2,1 billion and forms part of the larger Jindhal Group, which has total assets in excess of US$12 billion. With a debt of over US$300 million, small boys of steel will not be willing to absorb such debt into equity, unlike the bigger companies — Mittal and company. For instance, by February Arcelor was already holding onto cash of R4,3 billion to invest in anticipation of a conclusion of a possible acquisition of the Zimbabwean steel asset and make its first foray into iron ore production.
An official of Gateway says the group was keen on investing US$650 million in rehabilitating Zisco and bring back capacity to around a million tonnes annually in terms of installed capacity. The group, according to the official, was also ready to invest in a stainless steel plant in a move meant to create value addition and a power plant that derives its energy from heat.
Ziscosteel was the main foreign currency earner before Independence in 1980, but output has sharply fallen to just 78 000 tonnes of steel annually because its main furnace — which accounted for 70% of production — has been derelict for years. Also among the six initial bidders were Murray & Roberts, Reclamation, Jindhal Steel (India) and Steel Makers (Zimbabwe) in joint bids with Sunflag Iron and Steel of India and China Metallurgical Company. Even Industry minister Welshman Ncube was surprised by Mugabe’s “strange” decision not to sell 60% of Zisco’s equity on the basis that the two suitors were too “big”.
“That is the feeling of the presidency, as strange as that might seem,” Ncube told Reuters earlier this month.
“The feeling is that we are a small country and we will have problems with a big multilateral company. The thinking is that we need a medium-sized investor for Zisco.”
But if Mugabe has his way, then the future of Zisco will remain hazy.
Judging by Mugabe’s sentiments, the old  notion in business that bigger was said to be betterno longer  has credence.

Chris Muronzi

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