ZIMBABWE MERGER GONE WRONG HARMS INVESTMENT CLIMATE (SUCH

UNCLAS SECTION 01 OF 02 HARARE 000776 SENSITIVE SIPDIS AF/S FOR B.WALCH DRL FOR N.WILETT ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS STATE PASS TO USAID FOR J. HARMON AND L. DOBBINS NSC FOR SENIOR AFRICA DIRECTOR MICHELLE GAVIN E.O. 12958: N/A TAGS: ECON EINV ZI SUBJECT: ZIMBABWE MERGER GONE WRONG HARMS INVESTMENT CLIMATE (SUCH AS IT IS) ¶1. (U) SUMMARY: After the GOZ took control of a Leading business group this month, foreign press reports stoked fears of expropriations. But local observers tend to see this story as a business merger gone wrong rather than a ZANU-PF plot. Whatever the merits of that view, there will inevitably be damage to external confidence in Zimbabwe's investment climate. END SUMMARY. -------------- ZANU-PF Flies with the Vultures -------------- ¶2. (U) On September 11 the GOZ seized control of Kingdom Meikles Africa Limited (KMAL),once the biggest local company on Zimbabwe's stock exchange. Based on an anti-corruption statute, the move triggered press reports outside of Zimbabwe that President Mugabe's ZANU-PF party was ready to broaden expropriations beyond commercial farms. ¶3. (SBU) But the local perception of the KMAL saga is that it is not just another ZANU-PF looting spree. In the view of Embassy business contacts, the 2007 merger between Kingdom Financial Holdings (KFH) and Meikles Africa was rushed and badly managed. By the time the GOZ first intervened in January by temporarily taking control of some Meikles assets, KMAL had run aground. "ZANU-PF is just a vulture circling the carcass, they did not engineer this," said one businessman who has served on the boards of several Zimbabwean companies. At the time of the merger, KMAL had a market value of USD 500 million. The company is now worth about USD 90 million. -------------- Culture Clash -------------- ¶4. (SBU) Internal frictions at KMAL emerged from the incompatible corporate cultures of Meikles Africa and KFH, the bank built by self-made man Nigel Chanakira. After the merger, Chanakira's reportedly fervent Pentecostal style is said to have rubbed Meikles executives the wrong way. The board failed to keep a lid on internal disagreements, and a struggle over management control boiled over into the press. Many local observers believe Chanakira used money-laundering allegations against Meikles executive John Moxon as a way of preventing his own ouster from the KMAL board. The main purpose of a KMAL shareholders meeting scheduled for September 24 was to dismiss Chanakira and his closest allies from the board to reverse the merger. Chanakira secured a court order to postpone the meeting. A September 25 press report states that Chanakira is currently hospitalized in South Africa. ¶5. (U) While Harare businesspeople do not geerally attribute KMAL's troubles to ZANU-PF, there is a direct connection to GOZ policies that create acute uncertainties for businesses. Moxon has said in public that the KMAL merger was primarily a maneuver to protect Meikles Africa from the expected effects of "indigenization" legislation the GOZ was preparing in 2007. Before the merger, Meikles Africa already held a 34-percent stake in KFH. The Indigenization and Economic Empowerment Act that President Mugabe QIndigenization and Economic Empowerment Act that President Mugabe signed in March 2008 seeks to put majority ownership of businesses in the hands of "indigenous Zimbabweans," who are defined in the statute as "any person who before the 18th of April 1980 was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person." -------------- COMMENT -------------- ¶6. (SBU) Local perceptions notwithstanding, the GOZ's seizing of KMAL will inevitably undermine external confidence in what is called, for want of a better expression, Zimbabwe's investment HARARE 00000776 002 OF 002 climate. Despite claims by ZANU-PF and MDC officials alike that the current indigenization law will be used "flexibly," a more practical law and repeal of onerous statutes like the one the GOZ used to seize KMAL are necessary to restore investor confidence. But indigenization is a highly-charged issue, and it is unlikely the government, even its MDC members, will soon be willing to tackle this. END COMMENT. PETTERSON