Copperbelt Energy Corporation: MBO moves up

The wave of divestment by US utilities from emerging markets has created opportunities for several classes of buyer. The most frequently-cited movers are Japanese trading companies, particularly in Asia, or the small but visible emerging market funds dedicated to infrastructure. But local buyers are gaining in prominence.

The acquisition of Copperbelt Energy Corporation (CEC), by a mixed group of Zambian investors, a specialist emerging markets power developer, and a development finance institution, brings the management buy-out structures that predominate in US corporate finance to an African utility. It is also the first time a black empowerment organisation has been a factor in an infrastructure financing outside South Africa.

Copperbelt Energy Corporation is a specialist supplier of electricity to Zambia's copper mining industry. It was formed as the power division of Zambian Consolidated Copper Mines (ZCCM), the state-owned operator of most of the country's copper production. As part of the Chiluba administration's steps to liberalize the economy in the late 90s, the government sold 78% of CEC to a 50/50 joint venture of National Grid and Midlands Power for $58 million, with ZCCM retaining a 20% stake and local management 2%.

CEC's primary business is transmission, since it buys power from ZESCO, the state-owned owner, and sells it to users in Copperbelt Province, where the bulk of Zambia's copper production, and thus of the country's power demand, is located. CEC owns a high voltage (up to 220kV) transmission and bulk distribution power system and 80MW of gas-fired generation capacity, designed largely to act as a back-up source of power to drain mines should ZESCO's capacity fail. In 2004, CEC sold roughly 3, 818GWh of electricity, and made $35 million in gross profit on turnover of $120 million.

The business is low-risk, since CEC essentially earns a dollar tariff for transmitting electricity from ZESCO generating capacity to the end user, both in the form of a capacity charge and a charge according to load on the line. Costs are passed through, and CEC's greatest challenge is to keep its lines operating, and thefts and vandalism to a minimum. It also has capital expenditure requirements related to the continued demand from the booming copper industry, upgrades to both lines and back-up capacity, and the installation of fibre-optic cable along the network.

However, both Cinergy, which was acquired by Duke in April 2006, and National Grid wanted to concentrate on their core businesses in the US and Europe. Local management, which had taken an increasingly dominant role in CEC's operations, had teamed up with local investors and in 2004 made a pitch to Cinergy and National Grid to acquire the business.

In the time between the initial approach and 2006, when the sale process began in earnest, copper prices had reached greater heights, the previous owners were more inclined to sell up, and the requisite base of debt and equity investors were more readily available. The sale, and the necessary financing, closed on 27 October 2006.

The management and their adviser, Standard Bank, approached Dutch development finance institution FMO to seek its assistance in financing the acquisition. FMO has been among the more active equity investors in emerging market infrastructure, and also owns an equity stake in Aldwych Group, a specialist power developer formed by former AES executives. FMO, Aldwych and the Development Bank of South Africa between them own 40% of the vehicle for majority control of CEC, with local investors owning roughly 60%.

Zambia's foreign investment regulations, in large part a result of Chiluba's liberalisation, now act to reassure lenders and foreign equity owners, and to also put in place a tax-efficient holding company structure. The local management have brought in Zambian investors, including one based in London, to provide their share of the equity.

The vehicle for the Zambian shareholders' 60% stakes is Batoka Energy Corporation, which, together with the three foreign investors, own 100% of Zambia Energy Corporation Limited, in Zambia, which owns 100% of Zambia Energy Corporation (Ireland) Limited. The Irish holding company is the subject of outside mezzanine and quasi equity financing equal to roughly $60 million, and in turn owns 100% of an intermediate Dutch holding company, which owns 77% of CEC.

The structure is complex, and the sponsors are likely to try and compress it a little, although it does offer withholding tax benefits. More immediately, the structure will facilitate an issue of publicly-traded equity in CEC, probably through one of these holding companies. CEC is presently going through the registration process for this issue, which will add a large and powerful component to the Lusaka Stock Exchange.

The proceeds from the sale will probably retire some of the mezzanine debt and bring the buyers' stake in CEC down to just above 50%. The operating company will also raise up to $60 million in senior debt to fund current and future capital expenditure programmes. Both the acquisition and the planned issue demonstrate the current enthusiasm for such ownership structures in infrastructure finance, and the deal inevitably invites comparisons to KenGen, the Kenyan power generator whose listing, and equity, was riotously popular.

Nevertheless, the owners will need to keep an eye on the present state of government regulation, bearing in mind that Zambia must periodically renew CEC's license, and that local ownership is no guarantee against a future government's capriciousness. Moreover, at least some of the health of the business is tied to the health of the copper industry, which has suffered from periodic slumps in the past, and may do again.

However, CEC also plays a pivotal role in wheeling power from and two Zambia's neighbours in South Africa, Zimbabwe and Congo, some of which provide Zambia with spare capacity. Moreover, the Democratic Republic of the Congo has enormous untapped hydroelectric capacity. If it were to be wheeled to Zimbabwe, the rewards to CEC would be considerable.

The financing for Copperbelt has been described as the continent's first B loan, a reference to the leveraged loans that characterise buyouts in the US and Europe. The comparison is not entirely accurate since the financing package contains stronger covenants than might be typical in its US equivalent. But the structure, particularly the equity raising, could still be influential. Were South Africa's giant utility, Eskom, ever to be privatised, empowerment equity, and associated mezzanine debt, would be in demand.

Copperbelt Energy Corporation
Status: Financial close 27 October 2006
Size: $120 million
Location: Copperbelt, Zambia
Description: Management buyout
Sponsor: Zambian Energy Corporation
Sponsor financial advisor: Standard Bank Plc
Mandated lead arranger: Standard Bank of South Africa
Co-arrangers: FMO, DBSA
Sponsor legal adviser: Trinity International
Lenders legal adviser: Ashurst
Sellers: National Grid, Duke Energy Corporation
Sellers' legal adviser: CMS Cameron McKenna
Consultants: PB Power, SRK Consulting