Abil faces battle as Stangen deal fails

Liquidation proceedings could threaten business rescue efforts

AFRICAN Bank Investments Limited (Abil) could be headed for a liquidation battle in court after the collapse of a deal to sell its subsidiary Standard & General Insurance Company (Stangen) to African Bank’s “good bank”, which is being created from the failed Abil’s spoils.

The liquidation proceedings could undermine Abil’s business-rescue efforts and risk destroying the prospects of recovering about R966m owed to creditors, including SA’s major banks.

African Bank curator Tom Winterboer announced on Friday that the “good bank” would no longer buy Stangen. A day earlier, a last-ditch attempt to try to negotiate further on the sale of Stangen was made in a letter to Mr Winterboer. One of the proposals in the letter was for the “good bank” to do a black economic empowerment (BEE) deal if Stangen was to be successfully sold to the “good bank”.

However, the letter failed to convince the curator.

“The next step is to apply for the liquidation of Abil if they don’t come to the party,” one of Abil’s BEE shareholders told Business Day.

The African Bank “good bank” that is being created by Mr Winterboer wanted to buy Stangen for almost R1.4bn, but Abil’s BEE shareholders, Hlumisa and Eyomhlaba, interdicted the plan in court. They argued the price was too low and that there was no clear information on how it had been arrived at.

In a letter to Mr Winterboer dated October 15 and signed by Hlumisa chairman Desmond Lockey, it was noted: “We are writing this letter in a last-ditch attempt to avoid further litigation regarding the sale of Stangen. Such litigation is not, we believe, in anyone’s interest where a reasonable commercial outcome can be achieved.”

In the letter, the BEE share- holders argue that, with the demise of Abil, 13,000 BEE shareholders lost R1.5bn in shareholder value. In their attempt to try to get the attention of Mr Winterboer, they argued that BEE shareholders in Abil were “compelled to reinvest the vast bulk of the R712m dividends” received over the past nine years to buy more Abil shares in the market at market value in order to achieve a 10% black ownership by December.

The BEE deal was scheduled to mature in two months’ time.

“Stangen is the last remaining asset of any substantial value in Abil,” the letter to Mr Winterboer reads. “We could not accept a situation in which it was to be sold at below its embedded value, in a transaction which would provide little or no value for our shareholders, but would further assist the further capitalisation of the ‘good bank”’.

At the end, Mr Lockey then pleads for the “good bank” to sell 7% of its equity to Eyomhlaba and Hlumisa. However, Mr Winterboer, who is under pressure to create the “good bank” without delay, was having none of it.

He told Business Day on Friday the R1.4bn offer “was the culmination of a detailed engagement and negotiation with the Abil business-rescue practitioners and was at the limit of what would make economic sense for the bank”.

Despite the threat of liquidation proceeding, John Evans, one of Abil’s business-rescue practitioners, said the “business-rescue process is ongoing and the business-rescue practitioners are assessing the options and the impact the lapsing of the transaction will have”.

With the Stangen deal failing, Mr Winterboer is seeking alternative plans, including the “good bank” establishing a “cell captive” arrangement as an alternative insurance provider.

BRINKMANSHIP is often part of deal making. The art is to push the other side to the limit before they break. Going too far ends in disaster.

Last week provided examples of how to get it right, as well as wrong. SABMiller got it right, forcing Anheuser-Busch InBev to increase its offer four times, eventually to £44/share, 50% more than the share was trading at a month ago. On the other hand, in a very different situation, the black economic empowerment (BEE) shareholders in African Bank Investments Limited (Abil) got it wrong.

Efforts to sort out the African Bank mess have seen various interest groups fight to recover some of their lost investment. The most successful effort was by the tier 2 creditors in African Bank, who made such a legal nuisance of themselves they eventually got a R1.65bn settlement from the curators to stop them from frustrating the resolution process any further.

Perhaps inspired by that effort, the BEE shareholders in Abil, the formerly JSE-listed holding company in which they collectively held 4.9%, managed to obtain a court interdict two weeks ago that put the resolution of African Bank on hold.

The BEE shareholders, represented by former African National Congress MP and onetime PSG deal maker Desmond Lockey, managed to interdict a step in the process that would have seen the new African Bank buy the Stangen insurance company out of Abil.

Their view was that the R1.38bn the new bank would pay for Stangen was too low, which, given that it made a profit of R786m in the six months to March, was understandable.

The higher the price Abil could get for Stangen, the greater the chances shareholders in the entity would get any money from their failed investment. Ostensibly, the interdict was to enable the shareholders to obtain access to information about the transaction.

The BEE shareholders may have hoped it would be easier for the curators to pacify their resistance, perhaps by cutting them into a BEE deal for the new bank. But while the R1.38bn price tag appears low relative to the profits Stangen was making, the real test of what price it should get is what its alternatives are. And the problem is Stangen is not much without its continuing relationship with African Bank. Its credit life policies are attached to every loan African Bank issues.

But the bank has choices — it can break the relationship with Stangen and go with an alternative insurer. If that happens Stangen is worth only the value of its existing policies, which it can collect over time as the policies mature. And that value is in the region of the R1.38bn that African Bank was offering.

The interdict raised the threat of disrupting the February 1 launch date for the new bank. There have been many delays to the resolution process since curatorship first struck last August, and the curator team has had enough. So with the Stangen transaction interdicted, last Friday, they simply announced they were abandoning it. Instead, the new bank will set up its own cell captive structure to write new policies.

This is the worst outcome for Abil shareholders. The company is left with the Stangen policies and the premiums that will flow to them. But these will come in over several years as opposed to the R1.38bn of cash it would have received upfront. Also, the new African Bank is going to pursue all those policy holders and try to roll them into new loans and with them, new policies.

So the current value of the insurance firm may well not be realised — and it may also have issues around meeting the Financial Services Board’s licence requirements.

The R1.38bn would not have left any value for the ordinary shareholders after creditors and preference shareholders in Abil were settled. But there was a possibility of value in that the board could have tried alternatives to settling preference shareholders. Now the alternative is likely to be liquidation of the firm. Brinkmanship has backfired dramatically.

Last week we also received judgment on this newspaper and my application for information regarding the collapse of Alliance Mining. We won on every front, after what has been a three-year battle.

We will now be given all the transcripts and documents handed to an inquiry that was held into the company four years ago (though apparently not yet formally concluded).

I expect these will contain details on a massive fraud perpetuated by the directors, and for which there have been hardly any consequences.

You can read about it here next week.

But more than the particulars of the case, there is a principle that is important. Firms need to be open and transparent.