Zambian Energy Corporation – a management buy-out team – has taken over 77% of Copperbelt Energy Corporation (CEC) from National Grid and Duke Energy Corporation¹ with an acquisition financing that features mezzanine finance and deeply-subordinated quasi equity.

The deal is the prelude to a Copperbelt Energy IPO next year and is Zambia's first large scale black empowerment management buyout (MBO). The transaction – $120 million in stage one capex funding plus acquisition debt – is a blueprint for the development of indigenous private sector ownership of key infrastructure assets across the African continent.

In 1997, the power division of the Zambian Consolidated Copper Mines (ZCCM) was sold to National Grid and Duke Energy Corporation. Copperbelt Energy Corporation was the resultant entity, which provides power to the copper mines on the Copperbelt in Zambia. The new international owners underwent a period of investment in the business and implemented international best business practices to the point where the business was largely self-sufficient, employing mainly Zambians to manage the company.

CEC is a $130 million turnover company and has the freehold ownership of the high voltage (up to 220kV) transmission and bulk distribution power system serving the Copperbelt Province. Its geographical area contains the bulk of Zambia's power demand and all of the power used in the Province passes through CEC's system. It also has 80MW of generation capacity.

CEC buys its power from the state utility Zesco pursuant to a long-term power supply agreement and on- sells to the mining companies, again backed by long-term power purchase agreements. The back-to-back nature of the documentation insulates CEC from significant supply and offtake risks. The mining companies pay a dollar tariff based on a monthly capacity charge and an energy charge based on peak demand. In the unlikely event that power is not supplied by Zesco, CEC is able to provide the mines back-up generating capacity, which is essential in Zambia given the mines are waterlogged and require constant pumping.

In addition to the suite of documentation underpinning the business, the Government of Zambia also provides a support package in the form of the Development Agreement which affords the shareholders additional rights and protection.

The robust nature of the documentation and the favourable business climate in Zambia which permits offshore escrow accounts and full and unfettered repatriation of funds overseas, were key factors in closing the acquisition financing for the business. In addition, the acquisition received favourable support from the government and other regulatory bodies.

In late 2004, a group of local Zambian businessmen approached the sellers with an offer to purchase their combined 77% stake in the business. The group included experienced engineers who had a long track record of running power assets in Zambia. Standard Bank as financial adviser engineered a leveraged buyout with a combination of mezzanine finance, quasi equity and sponsor equity. The acquisition deal structure is presented below:

Zambian Energy Corporation (Ireland) Limited ("ZECI") purchased the entire share capital of Cinergy Zambia B.V. and National Grid Zambia B.V. which are Netherlands based holding companies shown in the diagram above as Dutch B.V. ZECI is the 100% subsidiary of Zambian Energy Corporation Limited, a Zambian resident company of which Batoka Energy Holdings (the local Zambian team) are 60% shareholders, with the remainder held by FMO, the Development Bank of South Africa and Aldwych International. The local management team therefore has majority control of CEC.
The deal is underpinned by funding from Standard Bank Group and the Development Finance Institutions FMO and DBSA. The acquisition funding comprises three levels of mezzanine finance differing in terms of seniority and equity finance from the sponsors. The tenor on the mezzanine finance ranges from 1 to 10 years at fixed rate pricing in the range of 14% to 18%. The deeply subordinated Tranche B mezzanine has a fixed coupon, a profit share and a cash sweep mechanism, which accelerates repayment of the facility when excess cash is available. The result is a deferral of the bulk of the dividends flowing to the shareholders beyond the final maturity of Tranche B. This ensures that the management team is adequately incentivised to ensure that the business performs beyond its target returns and are long term committed. The transaction is tightly structured to ensure proper corporate governance and financial discipline is adhered to throughout the term of the debt.
The next stage is to raise debt finance at the operating company level to fund CEC's capital expenditure expansion plans. This will result in senior debt being injected onto the balance sheet of CEC. The existing acquisition financiers have already approved the additional funding for the business, which will result in a total financing package of $120 million with the senior debt funding expected to be drawn down early next year. The tenors on the senior debt package range from 7 to 10 years. Pricing at this stage is undisclosed.
The final stage will be to apply to the Lusaka Stock Exchange to upgrade CEC from a quoted entity to a fully listed and traded stock. In the listing ZEC plans to sell down from its current holding of 77% to a simple 51% majority. The target investor base is expected to be Zambian pension funds, employees through an ESOP and other Zambian investors. An investor meeting is planned to take place before the end of November, with the listing targeted for the end of first quarter 2007. Achieving the sell down will result in a wide Zambian ownership and should stimulate trading on a stock exchange which to date has largely been illiquid with low volumes of trading.
The CEC MBO is a trail blazing transaction for the African continent. A successful privatisation of CEC in 1997 sold to international companies Duke Energy Corporation and National Grid has now been returned to Zambian ownership in the private sector. This is a perfect example of how local entrepreneurs and management across Africa can regain ownership of assets and at the same time stimulating commercial growth and inward investment. The forthcoming listing of the business on the Lusaka Stock Exchange will see the asset further broaden its ownership base within Zambia.

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 advisor: Trinity International LLP
Lenders legal advisor: Ashursts
Sellers: National Grid, Duke Energy Corporation
Sellers' legal advisor: Cameron McKenna

Footnote
¹ The original acquisition was by Midlands Power, which was acquired by Cinergy Corp. Cinergy Corp has recently merged with Duke Energy.