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Ghost Wrap #6 (MTN + Telcos | Steinhoff | Alviva | Mpact | PBT Group | Shoprite – Massmart | Grand Parade)

The Finance Ghost
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Ghost Wrap #6 (MTN + Telcos | Steinhoff | Alviva | Mpact | PBT Group | Shoprite – Massmart | Grand Parade)

Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.

In this week’s episode of Ghost Wrap, we cover:

  • Why the telecoms companies sold off so sharply last week (with a focus on MTN)
  • Steinhoff’s horrible news for shareholders and another crash in the price
  • A firm intention announcement for Alviva to be taken private at R28 per share
  • Mpact’s planned investment of R1.2 billion in Mpumalanga to support fruit exports
  • PBT Group offloading its B-BBEE preference shares to Sanlam Investment Management
  • Shoprite getting the green light to buy (most of) the cash & carry stores from Massmart
  • The board of Grand Parade Investments advising shareholders to accept the offer from GMB

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

Listen to the podcast below:

Ghost Bites (Accelerate | DRA Global | Grand Parade | Harmony | Implats – Northam – RBPlats | Mondi | MTN | Steinhoff)

The Finance Ghost
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Ghost Bites (Accelerate | DRA Global | Grand Parade | Harmony | Implats – Northam – RBPlats | Mondi | MTN | Steinhoff)

Accelerate isn’t really accelerating

Interim results for the six months to September reflect a mixed bag

Accelerate Property Fund’s share price is down 9.9% this year and the company is still trading at a huge discount to Net Asset Value (NAV) per share. The NAV is R5.00 and the share price is R1.00, so I wasn’t joking by describing it as huge.

With significant exposure to the office sector, Accelerate is suffering with substantial group vacancies. The vacancy rate has actually worsened from 17.3% to 19.9% based on gross lettable area. The bulk of the vacancies are in B- and C-grade office space and low income industrial space.

In such a difficult market, watch out for the weighted average lease expiry, which has moved from 5.9 years to 3.9 years. You want to see short-dated expiries in a booming market, not an ugly one where the last thing a landlord wants to do is renegotiate with a tenant.

In terms of debt, the loan-to-value (LTV) has improved from 48.5% to 42.1% but the interest cover ratio has gotten slightly worse (1.9x vs. 2.0x). Keep a close eye on this, as Accelerate has agreed with lenders to temporarily reduce the interest cover ratio covenant to 1.7x.

Due to the dividend reinvestment alternative offered to shareholders in July, the NAV per share has fallen from R6.20 to R5.00.

Overall, the fund remains under pressure and issues like load shedding certainly don’t help. It’s not easy to fill new space in this environment, so the vacancy rate at the newly redeveloped Fourways Mall is slowly coming down.

To try and improve the balance sheet, there are still non-core properties worth R566 million that are earmarked for sale. Disposals of R255 million (not included in the previous number) have been signed, which would drop the LTV by 170 basis points and reduce fund vacancy levels by 3.7%.

As was the case last year, there is no interim distribution by the company. The fund annoyingly doesn’t disclose distributable income per share, but a quick calc based on 1.224 billion shares in issue and distributable income of R110.6 million suggests distributable income per share of around R0.09 for the interim period.

With a share price of R1.00, that’s a yield of 18%. Is that enough to justify the risk?

An unusual use of treasury shares

DRA Global has raised almost R93 million by placing treasury shares

This is quite technical, so try follow as best you can.

If a listed company repurchases shares, it can do so in one of two ways. They can either be repurchased by the listed company itself (in which case the shares are cancelled) or by a subsidiary, in which case the shares still exist but the group effectively holds shares in itself.

There are other ways for a subsidiary to end up holding shares in its parent company. In all such situations, those are called treasury shares.

Usually, you hear nothing more about them. In the case of DRA Global though, the company has placed the treasury shares with Apex Partners and raised nearly R93 million in the process. This makes Apex a 8.54% shareholder in the group through a single deal.

As treasury shares were used, there is no change to the number of shares in issue, as this wasn’t an issuance of fresh shares.

Offer for Grand Parade is fair and reasonable

The board has recommended that shareholders accept the mandatory offer

With GMB Liquidity Corporation having breached the 35% ownership threshold in Grand Parade, a mandatory offer is triggered. The price in this case is R3.33 per share and shareholders can choose whether to accept it or not. This is different to a scheme of arrangement where a shareholder vote binds all shareholders to the outcome.

KPMG was appointed as independent expert and the firm has concluded that the offer price is both fair and reasonable to shareholders, which is a little unusual in mandatory offers. This means that the offeror (GMB) isn’t necessarily getting a great deal. If it was a good outcome for GMB, the offer would be determined as unfair (too low relative to fair value) but reasonable (higher than or equal to the current traded price).

On this basis, the independent board has recommended to Grand Parade shareholders that they accept the offer.

Harmony concludes the Eva Copper deal

This is a major strategic milestone for Harmony

In a deal that was first announced in October 2022, Harmony will now count Eva Copper as a group subsidiary and will hand over R3 billion for the pleasure. This is being funded through available cash and revolving credit facilities, with the company noting that it is comfortably within debt covenants even after this acquisition.

As South Africa’s largest gold miner by volume, there are two sources of diversification for Harmony in this deal: metal (this is a copper asset) and geographical (it is in Australia).

The company is busy reviewing the existing feasibility study. They will now focus on finding the most effective way to execute the project and finance the capital requirements to bring the mine into production.

There’s just one hurdle left for Implats

Well, one regulatory hurdle at least

The Impala Platinum (Implats) vs. Northam Platinum saga continues, with the companies locked in an ugly battle for Royal Bafokeng Platinum. A few lawyers have significantly improved their bank balances thanks to this fight.

With the latest extension to the longstop date, the offer period would’ve been open for over 12 months. If you think that large M&A deals happen quickly, you are horribly mistaken.

The final outstanding condition for the Implats offer is the issuance of a Compliance Certificate by the Takeover Regulation Panel. It took a lifetime to get Competition Tribunal approval for the deal, so the company was no doubt hoping for a speedy resolution of this outstanding item.

Alas, Northam has accused Royal Bafokeng Platinum of non-compliance with the Takeover Code, which in turn has resulted in delays to the issuance of the all-important Compliance Certificate.

Just to add further spice to the story, Implats has previously complained to the TRP about elements of Northam’s firm intention announcement, so it seems likely that Northam won’t be allowed to issue its offer circular until this is sorted out.

The elephant in the room has nothing to do with the regulatory process. No, Implats has a bigger problem – it has been outgunned by the Northam offer, so it doesn’t seem likely that the Implats offer in current form would be good enough to get the desired outcome. Implats reserves the right to increase the offer, so let’s wait and see what happens.

Mondi sells more Russian assets

This is unrelated to the proposed disposal of the large Mondi Syktyvkar assets

Mondi has agreed to sell its three Russian packaging converting operations to the Gotek Group for around €24 million at current exchange rates, though the deal is denominated in rubles (RUB 1.6 billion).

The loss on the disposal is €70 – €80 million at current exchange rates, so that’s a significant loss as a direct result of the geopolitical conditions we find ourselves in.

Much like the disposal of the Mondi Syktyvkar business (which is far more important as the deal is approximately 10x larger than this one), approval will be needed by the Russian Federation’s Government Sub-Commission for the Control of Foreign Investments.

I’m very pleased that I don’t have to be the Western suit-and-tie who attends that meeting.

MTN pre-close update

A 7% drop in the share price tells you what to expect here

Ahead of financial year-end (December), MTN has updated the market on trading conditions. These have been ugly in the final quarter of the year, reflected in the share prices of telecommunications companies that have come under pressure.

The group’s most important markets are South Africa, Nigeria and Ghana. Recent inflation rates across those markets are 7.5%, 21.1% and 50.3% respectively. That’s not easy.

Another issue that isn’t easy to manage is lack of availability of foreign currency, a problem that is plaguing a number of South African companies with African investments. Where companies need to get cash out of places like Nigeria, they are being forced to do it at “parallel rates” that are far less favourable than the theoretical market rates.

MTN Group has upstreamed R17.3 million in the 11-month period to November, including R6.5 billion from Nigeria. Holding company leverage ratios are flat vs. the Q3 levels.

Energy costs are a major consideration. Although MTN’s energy bill represents 5% – 7% of group costs, load shedding also puts a capital expenditure burden on the group as it needs to upgrade its towers. We’ve seen this coming through in Vodacom’s numbers as well.

Despite group revenue growth of 14.8% in the 11-month period to November, group EBITDA margin deteriorated since the last update in September. This is because of the pressure in the South African business, where revenue growth has slowed to 3.2%.

In Nigeria, service revenue grew by 21.3% and EBITDA margin was broadly in line with the 53.6% reported in the third quarter results.

The announcement does give an update on Ghana but mainly in terms of subscriber numbers, which have been topical recently as MTN was forced by the regulator to remove unregistered subscribers in that country. Of the 5.7 million subscribers that were initially barred at the end of November, 20% have been restated.

There is some good news in the fintech side of the business, where revenue is up 13.6% vs. the 12.9% reported in Q3. The ongoing build out of the agent and merchant network is contributing to this acceleration. More good news is that the Ghanaian government is planning to decrease the e-levy on electronic transactions from 1.5% of value to 1.0%.

A managed separation of the fintech business is underway and is expected to be completed in the first quarter of 2023.

Despite the obvious pressure on free cash flow, the dividend guidance of at least 330 cents per share for FY22 remains in place. The group also believes that it is still making solid progress in driving return on equity towards 25%.

Steinhoff: the end is nigh (for ordinary shareholders)

You can either lose all your money or almost all your money

Well, there we have it. The show is over at Steinhoff, with the creditors holding the keys to the business. The share price fell 64% on Thursday and I’m not sure why it didn’t fall further.

Again, I am thankful that I got out of this thing at the start of the year. For those who have been caught up in this pain, I truly feel sorry for you. It’s a hard lesson in understanding that no matter how interesting the underlying operations are (like Pepco in Europe), the holding company balance sheet is critical.

I won’t go into the technical details of the debt restructure. All you really need to know is that if shareholders vote in favour of the proposed restructure, the lenders will hold 100% of voting rights and 80% of the economic interest, leaving 20% behind for existing shareholders in the form of a new equity instrument that the group envisages will be unlisted.

If shareholders don’t vote in favour of the proposal, the lenders will own everything.

That’s it. Simple as that. Goodnight and goodbye, Steinhoff shareholders.

Little Bites:

  • Director dealings:
    • The interim CEO of Hulamin has bought shares worth R363k
    • A director of Mediclinic has sold shares worth R10.5 million, so he didn’t hang around for the payment by Remgro and friends under that offer
    • A non-executive director of British American Tobacco has acquired shares worth $81.5k
    • Des de Beer has bought another R551k worth of shares in Lighthouse Properties
    • JD Wiese has bought preference shares in Invicta worth R7.9 million
    • The investment entity of the management team of Ninety One has bought another £56k worth of shares
    • The company secretary of Impala Platinum has sold shares worth R971k
    • An associate of a director of Vukile has sold shares worth R1 million as part of a communicated plan to the market to reduce its debt with Investec
  • Mergers and acquisitions / major transactions in shares:
    • In another example of a failed B-BBEE structure (one that ends up “underwater” because the equity value ends up being lower than the outstanding debt), Redefine needs to restructure its empowerment trust because of a deficit of R1.9 billion. It’s a double-whammy of bad outcomes, as the executive incentive scheme (in which executives borrow money to buy shares) is also underwater. Borrowing money to buy shares is ALWAYS dangerous, even in property companies where there is supposedly a reliable yield.
    • Sable Exploration and Mining Limited noted that PBNJ, which is currently making a mandatory offer for the shares in the company, now holds a stake of 45.5% in the company.
    • Sebata Holdings has agree to sell its 55% stake in Freshmark Systems for R24.75 million. The profit after tax for the year ended March was R3.9 million, so that’s a decent P/E multiple for such a small company. Perhaps they will now have enough money to fix their website?
    • As part of a B-BBEE deal that was put in place way back in 2007 by Italtile, there have been tranches of repurchases of shares from Four Arrows Investments. The final tranche is now taking place, with a repurchase of shares at R11.51 per share. The deal value is over R77 million and the price is based on 83% of the 10-day volume-weighted average price (VWAP). The Italtile share price is under pressure at the moment based on prevailing consumer conditions.
    • The former CEO of Cashbuild has agreed to sell a large block of shares to the company in a specific repurchase transaction. With the share price having fallen 25% this year, it’s probably not a bad time for the company to effectively be investing in its own shares. This is a substantial deal worth over R194 million, representing around 4% of all shares in issue by the company. A circular will be issued to shareholders and they will need to approve the proposed transaction.
    • The scheme of arrangement for the delisting of OneLogix has been approved by shareholders and will go ahead once other outstanding conditions have been met.
    • After receiving shares in Mast Energy Development as partial settlement for an outstanding debt, Kibo sold shares worth nearly £240k to realise some of the stake in cash. Kibo now holds a 57.86% stake in Mast.
    • As part of its ongoing strategy to reduce the stake in Tencent and repurchase its own shares, Prosus has sold further shares in Tencent and now owns 26.99% in the Chinese tech giant.
  • Earnings:
    • South Ocean Holdings, a business that has nothing to do with fishing and everything to do with manufacturing electrical cables, has released a trading statement for the year ended December 2022. HEPS is expected to be 46% lower, coming in at 19.76 cents. The company blames the usual issues facing our industrial firms, like rising input costs, load shedding and Transnet.
  • Notable board changes:
    • Freshly unbundled group Zeda has announced that Lwazi Bam has been appointed as Chairman of the Board. As the ex-CEO of Deloitte Africa, he brings huge experience to the board.
    • Spar has announced the appointment of Mike Bosman as the Chairman of the Board, which means that Andrew Waller will resume his role as Lead Independent Director. With extensive experience on other listed boards, shareholders will hope that Bosman’s appointment will go some way towards improving the governance smell currently found at Spar.
    • The Chairman of the Board of Hyprop has stepped down to become the CEO of investment firm Arise. The new Chairman is Spiros Noussis, who was formerly the joint-CEO of NEPI Rockcastle.
    • Texton is on the hunt for a new CCFO after Pinny Hack resigned from the company.
    • Orion Minerals has appointed Peet van Coller as its new CFO. This comes off the back of successful capital raising activities with Triple Flag Precious Metals and the IDC, which are now in final implementation stages.
  • Housekeeping:
    • Nampak’s proposed rights offer is so huge that a share consolidation is being proposed as part of the deal, just to allow the rights offer price to be fixed at a practical level. This is literally a step to avoid Nampak becoming a penny stock with an extremely low share price that would make it difficult to trade.
    • If you are a shareholder in Industrials REIT, you should refer to the announcement released on Friday regarding the choice between a cash or scrip dividend.
    • Emira Property Fund, Transcend Residential Property Fund and Castleview Property Fund are all changing their year-end to March to simplify the group reporting structure. Castleview is the majority shareholder in Emira and Transcend is controlled by Emira.
    • Kaap Agri Limited is looking to change its name to KAL Group Limited, with an expected implementation date towards the end of February.
  • Progress reports by suspended companies:
    • In a quarterly progress report (a requirement when a listing has been suspended), Afristrat set out the numerous issues that the company has been dealing with. These range from the lack of an auditor through to legal action in Botswana against the management team who allegedly stole from the business. To add to this horrific situation, there is also a liquidation application underway that the company is trying to defend in court. In case you’re feeling bad about your festive season and you want something to make you feel better, go read the detailed announcements to see what this company is dealing with.
    • Similarly, Conduit Capital released a quarterly progress report. With the major business in the group placed under liquidation, nobody is quite sure what (if anything) is left. The company is prioritising the conclusion of the audits of the remaining insurance companies in the group, so that should bring some clarity once released. I doubt it will be an answer that delivers much good news for shareholders.

Ghost Mail (Adcorp | Alviva | Brimstone | Ellies | Mpact)

The Finance Ghost
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Ghost Mail (Adcorp | Alviva | Brimstone | Ellies | Mpact)

Adcorp to shut down allaboutXpert Australia

No buyers could be found, so voluntary administration comes next

As noted in recent results, Adcorp has been dealing with significant issues around profitability in the allaboutXpert Australia business. This is a non-core operation, so Adcorp wasn’t about to distract management and take risks with the balance sheet to fix it.

Efforts to find a buyer for the business have been unsuccessful, so Adcorp has elected to place the group into voluntary administration.

This business contributed under 1.7% of Adcorp’s revenue in the interim period and is clearly not financially lucrative, so shareholders are probably better off from this decision.

It’s “firm intention” time for Alviva

A jump in the share price of 10.3% was an early Christmas pressie for shareholders

After a cautionary announcement released back in June, a consortium of investors and some members of the Alviva management team will be making an offer to buy all remaining shares in the company.

This will be proposed as a scheme of arrangement, which is an expropriation mechanism that is used to apply the outcome to all shareholders provided the 75% approval is obtained.

The price of R28 per share is a premium of 45% to the volume weighted average price before the expression of interest was submitted in June.

This is effectively a take-private by the existing B-BBEE partners in Alviva who currently hold 18.7% in the company. If it goes ahead, this deal would position Alviva as a majority Black-Owned ICT company.

Brimstone voluntary NAV disclosure

The intrinsic NAV per share is down 11.7% over nine months

As an investment holding company, intrinsic net asset value (INAV) per share is the measure that most investors would use in assessing Brimstone. As is typical in these companies, the share would then trade at a discount to INAV per share for various reasons ranging from head office costs through to performance (or lack thereof) of underlying investments.

In the past couple of years, Brimstone has traded at a discount of roughly 45% to 55% of INAV. When the market pushes the risk-off button, the discount inevitably widens.

A major driver of the discount is that the bulk of the group’s value is derived from other listed companies that investors can access directly. Of the gross value of R5.1 billion, a significant R3.6 billion is attributed to the investments in Oceana and Sea Harvest. There are other investment holding companies on the JSE that trade at much smaller discounts, not least of all because they hold private assets rather than stakes in other listed companies.

As a technical point, investment holding companies generally don’t provide for capital gains tax on large stakes in listed companies, as there are income tax relief provisions available when unbundling stakes like these. An unbundling would be the likeliest realisation of value. In contrast, capital gains tax provisions are raised on smaller investments with the goal of the INAV then reflecting an after-tax view on the company.

Brimstone’s INAV has decreased by 11.7% over nine months.

Ellies: a group in transition

From satellites to “smart infrastructure”

With a loss after tax in the six months to October of R34.9 million, the winds of change need to blow at Ellies. In fact, the hurricane of change is needed, because losses have accelerated sharply.

In the past year, the net asset value per share has dropped by 36.9% and the share price doesn’t look much better to be honest.

With the Manufacturing segment closed, only the Trading and Distribution segment remains. With various cost-saving initiatives being implemented in the core operations, Ellies is also in the process of trying to raise capital to execute strategies in alternative energy, water storage and harvesting, connectivity and smart home technology.

It’s easy to play buzzword bingo of course. The real test lies in implementation, something that Ellies will need to prove to the market beyond the progress already made in alternative energy products. Eskom does a great job of helping with demand in that product category.

The balance sheet is starting to look rather weak, so Ellies needs to move quickly with these strategic changes.

Mpact to invest R1.2 billion in Mpumalanga

This investment is being driven by growth in the export fruit sector

With everything going on in South Africa (and especially load shedding), it’s easy to become despondent and forget that we still have a very strong private sector. We also have pockets of excellence that can compete on the global stage, like our fruit exports.

The downstream impact of a successful industry is that companies invest in the supply chain, creating jobs and driving the economy forward. A great example is Mpact’s R1.2 billion investment project at the Mkhondo Paper Mill in Mpumalanga. This mill focuses on semi-chemical fluting, a virgin containerboard grade that is used in cold-chain applications due to high strength, moisture resistance and durability.

The project is expected to be completed in 2025 and should produce an internal rate of return in excess of 20%.

It will be funded by Mpact’s existing operations and some debt, which would lead to borrowings peaking in 2024.

Little Bites:

  • Director dealings:
    • A prescribed officer of ADvTECH has sold shares worth roughly R1.45 million
    • An associate of a director of Ethos Capital has acquired shares worth over R430k
    • In a useful reminder that many JSE directors have borrowed money to buy their shares in the listed companies, a director of Equites has pledged more shares to Investec under a loan agreement
    • A prescribed officer of Spear REIT has sold shares worth R365k
  • Marshall Monteagle announced interim results for the six months to September. Group revenue from continuing operations increased by 53% and profit before tax on trading and property operations increased by 77%. But due to losses on revaluation and sales of investments, the group slipped into a net loss position.
  • As part of the broader deal with Allianz in Africa, Sanlam Emerging Markets has redeemed shares held by Santam. This results in a payment of R126.5 million to Santam. Notably, Santam retains its economic participation rights in the general insurance investments in India and Malaysia.
  • Southern Sun announced that the sale of the Southern Sun Ikoyi Hotel in Nigeria has met all conditions precedent, which means that the deal has closed and that the sales proceeds were received.
  • In a related party transaction that is an important part of Sea Harvest’s supply chain, the supply agreement with the Vuna Companies has been extended for a further three years. Brimstone is a shareholder in both companies. Although this isn’t a related party transaction as defined under JSE rules, the company hired an independent expert anyway and the expert has confirmed that the terms are fair.
  • As Nampak’s share price continues to plummet, Allan Gray has sold more shares and now holds 14.6484% in the company. That’s about 14.6484% too much.
  • The CEO of AYO Technology has retired and a successor will be named in due course.

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

Following the detailed cautionary in June, the Alviva Board has received a firm intention offer to acquire all the issued shares in the company not already owned by the Consortium (Tham Investments, P Ramasamy, Day One Asset Management and certain members of the management team). The proposed transaction is a cash offer of up to R2,56 billion for a purchase consideration of R28.00 per Alviva share, representing a 45% premium to the 30-day VWAP of R19.29. The transaction will result in Alviva becoming a majority black-owned privately held company. Shareholders can expect to receive a circular around December 23, 2022.

African Equity Empowerment Investments (AEEI) has made a firm intention announcement to acquire the 6.14% equity stake (15,976,380 shares) in Premier Fishing and Brands (PFB) held by minority shareholders. The stake represents the outstanding shares in PFB not held by AEEI excluding the 37.63% stake held by Sekunjalo Investments (3,57%) and 3Laws Capital South Africa (34.06%). AEEI which currently has a 56.23% stake will acquire the scheme shares for R1.60 per share and will delist PFB from the JSE, citing illiquidity and low free float as reasons.

PBT Group has disposed of its entire investment in preference shares held in Yonex Investments (a B-BBEE company) to Sanlam Investment Management for R53,3 million. PBT intends to distribute R31,5 million of the disposal consideration by way of a special distribution to shareholders.

Northam Platinum has increased the maximum cash component consideration in relation to its offer to shareholders in Royal Bafokeng Platinum from R10 billion to R17 billion. The offer price remains at R172,70 per share (R180,50 less dividend paid), substantially higher than Impala Platinum’s offer made in December 2021 to RBPlat shareholders of R150 per share – R90 in cash and 0.300 ordinary Impala Platinum shares per RBPlat share (R60).

Hybrid Equity, a division of Old Mutual Alternative Investments (Old Mutual), has invested a further R420 million to increase its stake in Mulilo. Hybrid Equity made its first investment in 2015 when it invested R120 million in the South African renewable energy developer.

The results of the general offer by Heriot REIT to purchase Safari Investments RSA shares has closed with acceptances from shareholders holding 23,664,848 Safari shares representing 7.6% of the total shares in issue. Following the closing, Heriot and concert parties hold 40.7% of the total share in issue.

Delta Property Fund continued with its disposal programme, selling the property situated at 28 Central Road in Kimberley. Known as Beconsfield, the property was acquired by Dino & Lambro Investments for R22,1 million. The proceeds will be utilised in the reduction of debt.

Shoprite has informed shareholders that following the Competition Tribunal’s findings, the August 2021 acquisition by the company of Massmart stores has been approved with certain conditions to address competition and public interest concerns. The ruling sees the exclusion of 15 stores, the majority of which are to be separately divest of by Massmart to small or medium-sized businesses. The final transaction which will be effective on 9 January 2023 will include 42 Cambridge Food and Rhino Cash and Carry stores (including adjacent liquor stores), two Fruitspot facilities, the Massfresh Meat business and 12 Masscash Cash and Carry stores.

Despite best efforts on the part of Adcorp management to dispose of AllaboutXpert Australia for a fair and reasonable price, the Australian subsidiary has been placed in voluntary administration. The business, on a consolidated basis, contributed less than 1.7% of the group’s revenue for the six months ended 31 August 2022.

Unlisted Companies

Epiroc, a Swedish productivity and sustainability partner for the mining and infrastructure industries, is to acquire Pretoria headquartered Mernok Elektronik. Mernok designs and produces proximity detection technologies and collision avoidance systems for customers based primarily in Africa. The acquisition is expected to be completed in the first quarter of 2023.

Tabono Investments, an investment company in Africa with experience in mining, logistics and recycling, and ACE Green Recycling, a US-based recycling platform for battery materials, are to form a joint venture to build and operate two environmentally sustainable battery recycling facilities in South Africa.

BOS Brands has secured an undisclosed sum of additional growth equity from an investment consortium to fund the expansion of the BOS Ice Tea brand into the UK from its established base in Europe. The consortium includes Siya Kolisi, his wife Rachel Kolisi, the Banducci family and a follow-on investment by the Ferguson family in the UK.

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Mantengu Mining has completed a rights offer raising R15 million. Of the 15 million offer shares, shareholders subscribed for 22.31% with the remaining 77.69% of the rights offer shares allocated to the underwriters.

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 2,437,853 Investec Plc shares at an average price of 483 pence per share (LSE and BATS Europe) and 1,584,603 Investec Plc shares at an average price of R101.62 per share (JSE). Since October 3rd the company has purchased 16,6 million shares.

Shareholders of Fortress REIT have approved the change of name of the company to Fortress Real Estate Investments. The counter will trade under its new name from 4th January 2023.

Recently unbundled to Barloworld shareholders on a 1 for 1 basis, Zeda which houses the car rental and vehicle leasing brands Avis and Budget, listed on the JSE this week. The share opened at R18 but closed its first day of trade at R16.70 giving the company a market capitalisation of R3,17 billion.

The termination of the listing of Nutritional Holdings has been formally advised by the JSE and the company will become an unlisted company from December 19, 2022.

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

Glencore this week repurchased 10,980,000 shares for a total consideration of £59,64 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed by February 2023.

South32 has this week repurchased a further 1,297,187 shares at an aggregate cost of A$5,38 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 5 to 9 December, 2022, a further 3,231,452 Prosus shares were repurchased for an aggregate €206,89 million and a further 591,745 Naspers shares for a total consideration of R1,62 billion.

British American Tobacco repurchased a further 1,838,550 shares this week for a total of £60,45 million.

Two companies issued profit warnings this week: Randgold & Exploration and Ellies.

Eight companies issued or withdrew cautionary notices. The companies were: AfroCentric Investment, Trustco, Premier Fishing and Brands, African Equity Empowerment, Luxe, Afristrat Investment, Nutritional Holdings and Alviva.

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Who’s doing what in the African M&A space?

Marylou Greig
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Who’s doing what in the African M&A space?

DealMakers AFRICA

Savannah Energy PLC, the British energy company focused on projects in Africa, is to acquire Petronas International’s entire oil and gas business in South Sudan through the acquisition of Petronas Carigali Nile for a cash purchase consideration of up to US$1,25 billion.

PTS Investments, a US-based provider of x-tech solutions, has acquired a stake in EDAM Healthcare Services, a healthtech startup for an undisclosed sum. The investment will accelerate growth plans, supporting the development of EDAM digital platform with the company hoping to reach 2,5 million users by the end of 2023.

Two foodtech startups, Saudi-based Jumlaty and Egypt-based Appetito, have announced their intention to merge to create a new company NOMU. The aim is to become MENA’s leading foodtech supply chain platform. Financial details were not disclosed.

Legendary Foods Africa, a Ghanaian food-tech business producing a cost-effective, nutritious, resource-efficient and accessible form of protein, has received a growth equity investment from Baylis Emerging Markets. The growth capital is needed to accelerate expansion plans which include enhanced data-collection and production capacity and the extension of the product line and distribution channels.

Ascent Capital’s acquisition of a 75% stake in East African plastic manufacturer Acme Containers has been approved by the Competition Authority of Kenya.

Lagos-based furniture e-commerce startup Taeillo has raised US$2,5 million from Aruwa Capital a Nigerian early-stage growth equity and gender-lens fund. The funds will be used to scale its “Pay with Flexi” product, reduce delivery times by pre-manufacturing some of its product and increase market share.

Justyol, a Morocco-based e-commerce startup has raised US$350,000 in a pre-seed round from Earn Rocket Investment. A cross-border marketplace connecting the Turkish fashion market with MENA markets, Justyol will use the funding to invest in technical development, scale its marketing efforts and expand in the region.

Bitcoin mining company Gritless, which assists in bringing new energy generation to rural communities in East Africa, has secured a US$2 million seed investment in a round led by Stillmark and Block. Gritless designs, builds and operates bitcoin mining sites alongside small-scale renewable energy producers in rural Africa where excess energy is not utilised.

DealMakers AFRICA is the Continent’s M&A publication
www.dealmakersafrica.com

Appropriate regulation is needed to help address SA’s power crisis

Mzukisi Kota and Jason Van Der Poel
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Appropriate regulation is needed to help address SA’s power crisis

Action is urgently needed to create enabling policies and regulations to liberalise South Africa’s energy market and kickstart major investment.

Over the next eight to 12 years, it is estimated that South Africa will have to build between 50 and 60 gigawatts (GW) of new energy capacity to replace its retiring coal-fired fleet, to meet forecast growth and demand. This will require investment of an estimated R1,8 to R3trn, without factoring in the cost of expanding the transmission infrastructure.

As advisers to government on various Independent Power Producers Procurement Programmes, and to the private sector on many private generation power projects, Webber Wentzel is well-versed in some of the structural issues that will have to be resolved if there is to be any hope of solving the power crisis.

  1. COHERENT POLICY AND IMPLEMENTATION

Although South Africa has published two iterations of the Integrated Resource Plan (IRP), setting out expected demand and the ideal energy mix for the future, these plans have not been accompanied by a coherent overarching energy policy, nor have they been implemented at the required pace to avoid the current supply gap. South Africa’s main source of power remains Eskom, a vertically integrated monopoly with mainly coal assets. The IRP needs to be urgently updated to increase the proportion of other forms of energy, such as renewables, storage and gas in the mix.

On a pro bono basis, Webber Wentzel has advised Business Unity SA in its review of the Electricity Regulation Act Amendment Bill, which was expected to come into force by the end of this year – a deadline which is looking increasingly unlikely to be met. The Bill will restructure the electricity supply industry in some fundamental and necessary ways. It takes the transmission function out of Eskom and into a separate entity, the Transmission System Operator (SOC) Ltd, which will set up a central purchasing agency to buy and sell power to customers under contracts.

This will create a step change in electricity regulation in SA. It will decentralise and liberalise the market to bring more private power onto the grid, together with whatever Eskom has to offer.

  1. CONTINUE TO LIBERALISE THE ENERGY MARKET

Despite interventions in the last two to three years, steps taken to liberalise South Africa’s electricity supply have been too small and too reluctant. Caps on the size of exempted private generation plants were gradually lifted, but the focus was on retaining central government planning. Even with the latest touted measures to completely remove the caps in respect of private parties, municipalities still need ministerial determinations and feasibility studies in order to directly procure generation capacity.

It should be possible for a municipality that can secure project finance to procure its own power, without having to overcome further regulatory hurdles. If municipalities were enabled to get utility-scale power directly, it would help to tackle the power crisis.

For the private sector, renewable energy ticks all the boxes: it helps businesses to decarbonise, shows that they are good corporate citizens, and helps them to manage cost and security of supply.

As the private sector seizes the opportunity to generate its own power, Webber Wentzel is advising on some of the biggest projects currently under way, like Anglo American’s joint venture, Envusa Energy, with EDF Renewables. Envusa will procure about 600MW of solar and wind power for Anglo and De Beers sites in Southern Africa.

Webber Wentzel is also acting for Sasol in the procurement of about 900MW of renewable energy from independent power producers, as well as advising Exxaro Coal on its procurement of 80MW of solar power for its Grootegeluk Mine; Coca-Cola on its procurement of rooftop renewable energy at sites elsewhere in Africa; and MTN on its carbon neutrality strategy, including rooftop, ground mounted and wheeled renewable energy generation.

A lot of our work at present is advising on private power deals and assisting bidders involved in the REIPPP Programme.

On the just energy transition, we are advising on new regulations and assisting parties involved in the energy procurement plans of some of the larger municipalities.

  1. RESOLVE TRANSMISSION BOTTLENECKS

One of the criticisms of the REIPP Programme was that it did not limit or otherwise delineate where projects could be situated – this was a missed opportunity. We still need to address issues like re-using the infrastructure around obsolete coal-fired power stations, as South Africa moves to net zero and faces bottlenecks in transmitting power from grid constrained areas in the country, such as the Northern Cape (solar) and the Eastern Cape (wind).

Regulatory change is needed as a matter of urgency, to address municipal wheeling rules and tariffs. A number of projects in the pipeline may not happen in the near future because they need to be wheeled through municipal distribution infrastructure, and there are no clear and consistent rules on wheeling at this level. Nersa needs to develop a coherent, consistent set of rules that allow for transparency on tariffs, and in a way that is economic for end-users. Under the Constitution, national government has powers to “impinge” on some municipal competencies when required in the national interest. Under the ERA Amendment Bill, the transmission system operator (TSO) will be in charge of grid development and has proactive obligations to ensure that the grid works as well as possible.

Mzukisi Kota and Jason Van Der Poel are Partners |Webber Wentzel

This article first appeared in the DealMakers’ Renewable Energy 2022 Feature

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Thorts: Corporate governance considerations for Boards of Directors overseeing entities outside of South Africa

Janke Strydom and Jacques Marais
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Thorts: Corporate governance considerations for Boards of Directors overseeing entities outside of South Africa

Financial assistance resolutions remain the cause of many sleepless nights for attorneys
and their clients.

The much written on Trevo Capital Ltd and others v Steinhoff International Holdings (Pty) Ltd and others (2833/2021) [2021] ZAWCHC 123 (Trevo Capital) decision has taught us valuable lessons on financial assistance to related companies. In this article, we discuss this case in relation to aspects that have not been highlighted much in previous reports of the case, and which we believe are important for the boards of directors overseeing related and inter-related entities incorporated outside of South Africa.

In this case, the third respondents are the financial creditors of Steinhoff International Holdings Proprietary Limited (SIHPL, previously SIHL) and the investors in a convertible bond (2021 Bond) issued by another company in the Steinhoff Group, namely Steinhoff Finance Holdings GmbH (SFHG), an Austrian entity. SIHPL guaranteed the obligations under the 2021 Bond, in terms of a guarantee (2014 Guarantee).

Following the discovery of accounting irregularities in the Steinhoff Group in 2017, Steinhoff was forced to restructure its debt in the European Union to avoid liquidation. Steinhoff proposed a compromise of its financial obligations to three classes of creditors, including the so-called financial creditors.

The proposed compromise required SIHPL to restructure its debt, and included a contingent payment undertaking (CPU) to the second respondent (an agent for the financial creditors).

Under the CPU, the SFHG debt in respect of the 2021 Bond was restated by way of bondholders providing cashless loans to Lux Finco 1, incorporated in Luxembourg, and on lending the cashless proceeds to SFHG, pursuant to an inter-company loan, to discharge its obligations under existing SFHG debt. The CPU recognises that SIHPL assumes the role of guarantor in respect of obligations originally owed by SFHG under the 2021 Bond, and later to Lux Finco 1.

The board of SIHL took steps to comply with section 45(3) of the Companies Act, 71 of 2008 (Companies Act) in respect of the 2014 Guarantee, but failed to comply with s45(3) in respect of the CPU and the resulting obligations to Lux Finco 1.

Financial Assistance to Related Foreign Companies

In Trevo Capital, the respondents argued that the applicants have no standing and that s45 is not applicable, since the financial assistance was advanced to a foreign company, namely SFGH. This raised the question of whether s45 applies to financial assistance provided to a foreign company.

To answer this question, the Court followed a contextual method of interpretation by referring to the text of s45 and other provisions of the Companies Act, and to the context and apparent purpose of the financial assistance provisions. The Court found that –
i. s45 did not expressly refer to a “foreign company” (a defined term in s1 of the Companies Act), but that this did not exclude foreign companies, and that foreign companies fell within the corporation category. As a reminder, the term corporation is referred to in s45(2) in the following context, “the board may authorise the company to provide direct or indirect financial assistance to … a related or inter-related company or corporation, or to a member of a related or inter-related corporation, or to a person related to any such company, corporation…”; the purpose of the financial assistance provisions is to prevent the abuse of the company’s directors’ powers by advancing financial assistance to foreign entities without safeguarding the shareholders’ and the company’s creditors’ interests;

ii. a generous interpretation of s45, to include financial assistance given by a South African entity to foreign recipients, was in line with the purpose of the provision and, in the court’s view, intended by the legislature; and that

iii. SIHL had given financial assistance to a foreign entity and had to comply with s45.

Applying the Solvency and Liquidity Test

The applicants contended that –
i. when the board approved the 2014 Guarantee, SIHL was factually and materially insolvent as a result of the overstatement of its assets and the inclusion of misleading information in its financial statements. Therefore, the board could not reasonably find that SIHPL would be solvent and liquid following the conclusion of the 2014 Guarantee; and that

ii. the board had to investigate and interrogate the financial statements before reaching a conclusion.

The Court –
i. accepted that the requirement in s45(3)(b) of the Companies Act that the “board is satisfied” is not a purely subjective test and that the board must take reasonably foreseeable circumstances into account; and

ii. noted that SIHL’s board took steps to comply with the requirements of s45 and considered fair and reasonable opinions prepared by reputable auditing and law firms before concluding that the conditions of s45(3) were met.

Thus, the applicant’s retrospective analysis of SIHL’s financial position, following the discovery of accounting irregularities in 2017, did not convince the court that the board had violated the requirements of s45 of the Companies Act when it approved the 2014 Guarantee.

Restructure of Debt – New Financial Assistance

The applicants argued that the CPU amounted to a new loan granted by financial creditors to Lux Finco 1, and that SIHPL’s guarantee of this loan amounted to financial assistance to a related company.

The respondents and the financial creditors argued that the CPU was not a new debt, but merely a restatement of an existing debt under the 2021 Bond and 2014 Guarantee, which
was approved by the board. As such, SIHPL did not provide further financial assistance.

The Court disagreed and found that the restatement or restructuring of debt on new terms and owing to a new party amounted to a new debt for the purposes of s45.

The fact that the quantum of the debt remained the same was irrelevant, as SIHPL’s board had to consider the revised terms of the restated debt, including the recipient of payment, and in so doing, the board had to comply with s45.

Conclusion

Trevo Capital has reminded us of three valuable principles relating to financial assistance. Firstly, financial assistance to a related foreign entity falls within the scope of s45 of the Companies Act. It is imperative to bear this in mind when group companies include companies incorporated outside of South Africa. Secondly, when applying the solvency and liquidity and fair and reasonable tests, the board must take reasonable, foreseeable circumstances into account. Thus, if the board is aware of any circumstances that could impact on the solvency and liquidity of the company (which may not be reflected in the company’s financial statements), it must take this into account when complying with s45(3). Lastly, restructured debt on new terms, which includes new counterparties, will require new financial assistance resolutions, even if the quantum of the debt has not changed.

Janke Strydom is a Partner and Jacques Marais a Senior Associate | Fasken.

This article first appeared in DealMakers, SA’s quarterly M&A publication

DealMakers is SA’s M&A publication
www.dealmakerssouthafrica.com

Food for thought: SAFEs and regulatory aspects

Njeri Wagacha and Rizichi Kashero-Ondego
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Food for thought: SAFEs and regulatory aspects

When we consider the modern venture capital (VC) space, the first instrument that comes to mind is a simple agreement for future equity (SAFE). SAFEs were introduced in 2013, by the American start-up accelerator, Y Combinator, and are essentially a financing document based on US law. The premise is relatively easy and attractive: (i) they are simple (as they adopt a standard form); (ii) they have low transaction costs (as they are barely negotiated); and (iii) they contain founder-friendly terms (as they are used to promote start-ups in their seed financing rounds).

To add to this, they have been adaptable for local jurisdictions. In the UK, the SAFE is known as an advance subscription agreement (ASA), and the main difference is that rather than an investor agreeing on a conversion to equity, it is for a subscription to shares.

In Austria, SAFEs are required to be executed in the form of a notarial deed, as is required for any agreement on the transfer of shares of a limited liability company.

In Sweden, the notion that a SAFE can convert into equity without the involvement of the shareholders, i.e. pre-emption rights, only applies if the SAFE is structured as a convertible instrument – the concept of conversion to equity is one that has to be negotiated amongst the parties.

Aside from the nascent risk that the start-up fails and the investment is not realised, one has to understand that there are risks that may outweigh the benefits of using SAFEs or ASAs. Indeed, we need to be aware that the enforceability of the SAFE may soon become an issue to consider.

COMPETITION ASPECTS

The nature of SAFEs is that promised equity and other rights are only available to an investor on the occurrence of a triggering event. The equity, depending on the structure of the agreement, could be pre-determined in the case of a post-money valuation. Further, other rights could also be granted, which include board seats, board observer seats, participation in future SAFEs rights, and information rights, to name a few. Some of these rights, such as board seat and board observer seat rights, may even be granted before the conversion of the SAFE to equity.

Using Kenya as an example, a merger is defined in the Competition Authority Act No. 12 of 2010 (Competition Act) as an “acquisition of shares, business or other assets, whether inside or outside Kenya, resulting in the change of control of a business, part of a business or an asset of a business in Kenya in any manner and includes a takeover” (our emphasis). Further, the Consolidated Guidelines on the Substantive Assessment of Mergers under the Competition Act provide that the competition authority of Kenya will analyse the relationship between the parties on a case by case basis. Some of the factors that they will take into consideration are the ability to appoint, or to veto the appointment of a majority of the directors, or to materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control. Based on the definition, we can surmise that in some instances, parties will have to obtain consent from the competition authority for the grant of certain rights to an investor.

However, the question that arises is, should competition clearance be obtained and, if so, when? At the point of entering the SAFE? Or at the point of conversion? Further, is there a risk if local competition authorities refuse to grant approval or, instead, require onerous conditions to be fulfilled before approvals are granted? The greater question then arises as to what happens to the funds that have already been deployed? It is advisable that mechanisms be placed in a SAFE if the rights or equity being promised to the investor change the control of the business (as applicable to the jurisdiction). One may make it a condition to obtain approval from the competition authority before the conversion takes place and, in an instance where approval is not obtained, mechanisms may be included to ensure the ability to unwind the transaction, or to require that the investment converts to debt.

Reassuringly, in most jurisdictions, including Kenya, financial thresholds apply when seeking competition clearance and, in the case of start-ups, these may not be met. However, as an investor, it is important to consider the particular jurisdiction involved, the stage in which you are making your investment, the target’s current cap-table, its turnover, and the number of other SAFEs that may have been issued, prior to making the decision to seek competition clearance.

OTHER REGULATORY APPROVALS

In addition to the competition approvals, one also has to consider whether, with respect to a business, the SAFE is in a regulated industry such as insurance, oil and gas and digital lending. Depending on the regulatory authority, a regulated business may be required to notify a regulator or obtain consent before a new shareholder acquires a certain threshold of equity. In this case, one should consider implementing a mechanism to notify or obtain consent from the regulator before the conversion is finalised.

Local content requirements in specific jurisdictions should also be considered. In Kenya, for example, the insurance industry restricts foreign ownership: at least one third of the shares in an insurance company must be owned by a local. It is, therefore, prudent to ensure before investing in a regulated business that the shareholders maintain local shareholding requirements throughout the seed fundraising process to conversion into equity.

Further, it may be an additional obligation for a director to be deemed fit and proper by the regulatory authority before they take on the position as a board member. This may be of specific concern, especially where the investor obtains a board seat before the conversion to equity. In this case, one must obtain the required consent from the regulator. In the alternative, it may be beneficial for the investor to obtain information rights, giving them the right to receive all information from the board, instead of acquiring a board seat. However, this may not give the element of control that most investors are looking to obtain.

PRE-EMPTION RIGHTS

Similar to Sweden and the UK, Kenya provides for mandatory pre-emption rights in its company law. Therefore, the aspect of automatic conversion to equity will need to be carefully considered, depending on the governing law of the SAFE. It may be a requirement for a waiver to be obtained from shareholders before the conversion to equity. One might, therefore, need to consider whether it is permissible under local law to obtain consent before entering the SAFE.

CONCLUSION

In conclusion, entering into a SAFE, while relatively simple on the face of it, requires much more long-term thinking to ensure that both founder and investor are protected. As practitioners, we need to constantly analyse SAFE documentation to ensure compliance with local laws, to guarantee that our clients effectively reap its benefits. Regulatory and practical aspects need to be considered when one is trying to conclude a SAFE quickly. If acting for an investor, we must advise them that as the SAFE develops, caution needs to be exercised to ensure that their investment is protected.

Njeri Wagacha is a Partner and Rizichi Kashero-Ondego an Associate | CDH Kenya

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

No relaxing into the holidays

The Finance Ghost
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No relaxing into the holidays

Andre Botha of TreasuryONE reminds us that even if some people are already on the beach, our currency certainly isn’t.

Economic news and events that could affect the rand and the market are continuing as we approach the end of the year. But, before we delve into the events of the week, it is probably an opportune time to take a look back at some of the early-year events that are still affecting the market.

First, there is inflation, which has been on the rise all across the world as central banks struggle to combat the scourge. We have seen unprecedented hikes, with many countries on the verge of hiking themselves into a recession. Given that the majority of the world is anticipated to enter a recession, this is what we anticipate will be the base play of 2023. With the Fed leading the way in the initial part of hiking rates, we saw a rampant US dollar, and risky currencies like the rand were under pressure in the back half of the year.

US dollar rollercoaster for the year:

Second, the aftermath of the conflict between Russia and Ukraine continues to affect the Eurozone, where there have been – and will certainly be – further energy crises because of the reliance on Russian gas. Recent months have seen an increase in gas costs in the UK and the Eurozone due to the anticipated colder winter. This could fuel the inflation monster further in those countries that are most affected by the energy crisis.

Locally, there is the Phala Phala scandal and the possibility of a presidential resignation. Even though the President did not resign, the news surrounding the Presidency has caused the market to experience some volatility. We have the ANC elective conference at the end of the week, but we do not anticipate any significant deviations from the norm. However, stranger things have happened, and any deviation from the narrative could send the markets into a frenzy.

This brings us to this week, where a lot will happen in a very short amount of time. First, we have the US CPI number on Tuesday, where last week’s higher-than-expected PPI number caused some market participants to anticipate a higher-than-expected CPI number following several months of lower-than-expected inflation. Should the number print higher, we can expect the rand and other risky assets to run with it, but with the risk premium already built in, should the number print lower, we can expect a swift reverse in risky assets.

Inflation spike in the US:

On Wednesday, we have the FOMC meeting, where we expect the Fed to hike by 50 basis points. Looking at the US dollar and its performance of late, we expect that lower rate hikes have been priced in, and thus the rally in the US dollar has run out of steam a little. The key will be the press conference after the announcement where the thinking of the Fed will be revealed as well as what the new CPI number will have changed their thinking.

On Thursday we have the ECB interest rate decision and we also expect that the ECB will hike rates by 50 basis points. The ECB are in a bit of a tight spot as they are behind the curve and also hiking into an anaemic economy across the board. It will also be insightful as to where the thinking of the ECB is and how they propose to tackle inflation and interest rates going forward.

We are in for a busy week in the market, before the calm of the December holidays hits us. 

To learn more about how TreasuryONE can help you navigate the markets and manage risk in your business, visit the website.

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