- Nature of entity (CPC)
CPCs, or Special Purpose Acquisition Companies as they are known elsewhere, are structures that have been used in a number of countries around the world, but are new to Namibia. These companies are cash shells that are listed on the stock exchange for the purpose of capital raising, ultimately to purchase or develop assets that fulfil a set of predetermined criteria, as stipulated in the company’s listing documentation.
The CPC structure is a structure that has gained popularity in various markets in the world, especially in the United States and Canada. CPCs are generally used in circumstances similar to reverse mergers, but offer the benefits of being well funded and liquid, having hand-picked suitably experienced management teams, and offering a clean slate. In South Africa, a number of CPC type listings have been done over recent years under the Johannesburg Stock Exchange equivalent of the CPC, the Special Purpose Acquisition Company.
These structures serve an important role in developing the financial sector, as well as addressing situations where conventional financing methods are not viable, by facilitating access to financing for the development of large projects through the listed capital markets.
As listed entities, CPCs must abide by conventional stock exchange rules, as well as rules put in place specifically for CPCs. The additional rules are generally aimed to ensure the best possible protection for investors.
The cash-shell nature of CPCs, and the Listing Requirements for CPCs, requires that at the time of listing these companies have no on-going operations.
Once a CPC has completed the acquisition of a Viable Asset, it is no longer considered a CPC and continues to operate as a conventional listed company.
CPCs or similar structures have been used in a number of countries for projects in the mining, energy, technology, infrastructure and similar sectors. No CPC has yet been listed in Namibia.
Nimbus will be the first CPC on the NSX.
- Investment criteria
Nimbus has clearly defined investment criteria whereby Viable Assets will be evaluated. In essence, these may include direct or indirect investments in the ICT sector in sub-Saharan Africa. Investments will be evaluated against a required rate of return, based on the capital asset pricing model, with the equity risk premium calculated as per a macroeconomic model that considers the country of investment’s long-term government yield, expected real growth in GDP, expected inflation and the relative valuation of the local equity market. In addition to the equity risk premium, the required rate of return will also consider the specific risk premium of the considered Viable Asset, based on earnings visibility.
The Listing of Nimbus on the NSX will be done via private-placement. As such, the subscription for Shares will be limited to Selected Investors. All Offer Proceeds will be paid into, and held in escrow, by the Escrow Agent, until such time as Viable Assets are identified, investigated and approved by the Board and Shareholders. As a result, all payments from the Escrow Account will either be determined pre-listing (as per the Pre-listing Statement), or require approval from Shareholders in order for the Escrow Agent to release such funds.
Following the Listing of Nimbus on the NSX, as per the Investment Agreement, Cirrus Capital will identify and evaluate potential Viable Assets. Once the research, valuation and due diligence have been conducted, and Cirrus Capital is satisfied with the potential Viable Assets, Cirrus Capital will present such to the Investment Committee of the Board for consideration. If approved, the Investment Committee will take the Viable Assets to the Board for a vote by disinterested Directors.
If approved by the Board, the Viable Assets will be proposed to Shareholders via a circular, to be voted on at a general meeting of Shareholders. The circular will also include proposals for the application of any remaining Offer Proceeds.
Once approved by the Shareholders and acquired, the Viable Assets will be managed in-line with the individual transaction agreements and the Management Agreement signed between Paratus Telecom (the Manager) and Nimbus.
After the Initial Period, any residual Offer Proceeds that have not been successfully deployed towards Viable Assets will be returned to Shareholders, together with interest, less fees.
A number of protections for Shareholders are built into the Listing Requirements and the structure of the CPC. In addition thereto, shareholder protection has been built into the Nimbus documentation, structures and agreements, so as to provide Shareholders with confidence despite the so-far unknown nature of the CPC structure in the Namibian market.
The protections contained in the Listing Requirements, all of which must be complied with, include but are not limited to:
- The Company must have no on-going operations at the time of listing, meaning that no undisclosed or unknown contingent liabilities can exist in the entity being listed.
- The Company must comply with the minimum disclosures of the NSX, resulting in a greater standard of transparency being required from the Company than from unlisted entities.
- The Company may not have any debt during the Initial Period, meaning that until Viable Assets are acquired, the Company may not carry debt on the balance sheet, eliminating the risk that interest payments will erode the capital base.
- Funds must be kept in an Escrow Account and managed by the Escrow Agent, only to be released on approval by Shareholders or in line with the pre-approved expenditure budget disclosed in the Pre-listing Statement, meaning that the Board and other contracted parties do not have free reign to disburse Shareholder’s funds.
- The Company must comply with corporate governance standards set out in the Corporate Governance Code for Namibia (NamCode), meaning that the corporate governance standards applied to the Company are enforced as part of the Listing Requirements, compared to the more voluntary requirements for unlisted entities.
- The Listing Requirements stipulates that a CPC must satisfy the NSX that its board of directors has sufficient and satisfactory experience in the management of the type of Viable Assets in which acquisitions are proposed to be made.
Additional protections built into the Nimbus documentation, structures and agreements include, but are not limited to:
- The separation of duties between the Management Agreement and Investment Agreement. This means that all potential Viable Assets must be presented to the Board by the Investment Manager, therefore the Manager will not be able to propose to the Board Viable Assets that serve the interest of the Manager rather than those of the Shareholders.
- Investment screening goes through a four-stage process, with three rounds of approval (by the Investment Committee, disinterested Directors and the Shareholders), meaning that not only are there ample opportunities for in-depth scrutiny of proposed Viable Assets, but also that the Shareholders have the final say with regards to whether Offer Proceeds will be deployed towards proposed Viable Assets.
- Viable Assets will be sought within clearly defined, pre-determined guidelines. These have been disclosed in paragraph 8.2 of the Pre-listing Statement.
- CPCs are founded and invested on the strength of the experience and skill of the management teams that are appointed to manage their affairs and source Viable Assets. In this regard, the Corporate Advisors have hand selected each Board member for their unique skillset. As a result, talented and suitably experienced Independent Directors have been appointed, with top-tier legal, financial and ICT skills being independently represented on the Board.
- Concerted efforts have been made to minimize the pre-acquisition costs and the corresponding risk to Shareholders. To the extent possible, costs are incurred only on or after successful acquisitions of Viable Assets take place, so as to align risks and return for all stakeholders. Should Nimbus fail to acquire Viable Assets, the return of Offer Proceeds to the Shareholders after the Initial Period will be maximized to the extent possible by interest earned through investment of Offer Proceeds in accordance with the Escrow Agreement. The opportunity cost of making an investment into Nimbus will thus be relatively low. Additionally, the fees earned by both the management and investment teams are largely contingent on Viable Assets being successfully acquired, meaning that incentives are aligned between Shareholders and these teams to ensure Viable Assets are procured. The budgeted expenditure and the timing thereof are disclosed in more detail in paragraph 10 of the Pre-listing Statement.
- The out-sourcing of both the management and investment activities of Nimbus ensures that Nimbus is not required, at least in the Initial Period, to hire full time staff to perform the operations of what is, until acquisitions of Viable Assets are made, a non-operating company. Moreover, the appointment of management and investment teams on an outsourcing basis ensures that the best technical skills required to acquire Viable Assets and manage those Viable Assets, have been sourced. Investors are being exposed to sector leading skills whilst investment risk has been mitigated.
- The separation of powers between the management and investment teams ensures that the Manager will not be able to directly present potential Viable Assets (that might serve the purpose of the Manager rather than those of the Shareholders) to the Board. As such, only Viable Assets that meet the criteria of the investment team, as overseen by the Investment Committee, will be presented to the Board and ultimately to Shareholders. This separation of powers ensures that the interests of the Shareholders are protected.
- The listing and operating cost of the CPC for its Initial Period are predefined in paragraph 10 of the Pre-listing Statement, and can only be amended by special resolution of the Shareholders. As a result, Shareholders can be confident of the costs that will be incurred by the CPC, and as such assess the minimum return that the CPC should generate should no Viable Assets be acquired.
Despite exceptional growth, estimated by the UN’s International Telecommunication Union at a compounded annual growth rate of over 50% per year over the past five years in developing countries, many of these countries still possess far-below average internet penetration rates and access to ICT services.
The internet penetration rates across sub-Saharan Africa, particularly in the lower income and land-locked nations, remain well below global averages. The vast majority of the continent’s internet comes from undersea cables along the continent’s east and west coasts, with these cables representing over 90% of all internet provided to the continent.
The socio-economic benefits of access to ICT services and the internet are extensive, with access to the internet having a strong positive correlation with short-term economic activity and growth. In addition thereto, the long-term educational and other socio-economic benefits from improved ICT penetration rates are well established.
As a result of the growing demand for, and under-penetration of, internet and ICT services across sub-Saharan Africa, investment in this sector can be highly attractive, both from a return and social impact perspective.
By improving internet connectivity through the region by connecting the continent’s current and future fiber networks to the West African Cable System through the Namibian landing station in Swakopmund, not only will we see improved economic activity in Namibia and our key trading partners, but we can also expect to see additional dramatic social and socio-economic benefits for the local and regional populations.
The CPC structure allows for great flexibility with regards to access to funding, and the funding model is scalable in a manner that most alternative structures or financing approaches are not.
Viable Assets that have been acquired by Nimbus will be managed by Paratus Telecommunications (Proprietary) Limited (“the Manager”), one of Namibia’s largest private telecommunications companies. The Manager is a proudly Namibian, home-grown company incorporated in 2003. The Manager has a strong track record, growing revenue, and on account of their Namibian and pan-African presence, have successfully grown continent wide revenues from U$1 million in 2006, to U$64 million by 2015, a compounded annual growth rate of 57.5%.
Despite their humble beginnings in Namibia, the Manager has become a pan-African telecommunications operator, with a physical presence in seven sub-Saharan African countries, and selling services in a total of 22 sub-Saharan African countries. In this regard, the Manager provides internet communication services, directly and indirectly, to millions of people across Africa, many of whom live in countries with limited internet access beyond that provided by the Manager.
The Board of Nimbus is of critical importance because of the CPC nature of Nimbus on Listing. This is largely due to the fact that the Board will ensure that the Offer Proceeds are utilized over the Initial Period, and invested into Viable Assets that meet the investment and return criteria.
As such, striking a suitable balance between the executives and non-executives, and their skillsets, is vital. The structure of the Board adopts the guidance provided by the NamCode, which provides best practice principles to assist and guide the Board.
The Board comprises of six Namibians, one South African and one German, and collectively boasts expertise within the legal, financial and ICT fields.
The composition of the Board is shown below:
- Investor benefits
The Listing of Nimbus on the NSX presents a number of opportunities for investors.
The Listing provides diversification for Shareholders with regards to:
- The sector:
The NSX local index is highly concentrated in financial stocks;
- Geographical exposure:
The NSX local index revenues are predominantly generated from Namibia, while Nimbus will seek to generate a significant portion of its revenues from the rest of sub-Saharan Africa as well as Namibia; and
The vast majority of the revenue generated on the NSX local index is Namibia Dollar or Rand revenue, while Nimbus will seek to generate Namibia Dollar, Rand and US Dollar revenues.
Nimbus, being an ICT focused CPC will provide Shareholders with exposure to one of the fastest growing sectors in the world, in one of the fastest growing jurisdictions in the world.
To capitalise on these opportunities, scalability is paramount. The CPC structure is highly scalable, and thus allows for efficient expansion. This presents an opportunity for investors to partake in a new, fast growing entity on the NSX.
The Management team provided by the Manager has a track record of growing and running ICT businesses across the African continent. They are well positioned to drive the growth of Nimbus across Namibia and into sub-Saharan Africa in a mutually beneficial manner for all stakeholders.
CPCs as a concept are new to Namibia, and the Listing of Nimbus on the NSX provides an opportunity to establish the concept. CPCs open new investment opportunities for Namibian investors, and may contribute toward the development of the country through deploying private capital towards infrastructure and business development in Namibia and across the region.
Risks to Shareholders have been carefully managed within the Nimbus structure:
- Fees have been kept minimal until Viable Assets are acquired and, where possible, are contingent upon successful acquisitions being made;
- Skilled independent Board members have been appointed to provide sector specific skills in oversight in the acquisition of Viable Assets; and
- Separation of powers has been ensured between the Shareholders, the Manager, the Board and the investment team.
As a result, the opportunity cost associated with no Viable Assets being acquired by Nimbus is limited to little more than 2% per year relative to a money market return.