IFC could force Net1 to buy back its shares for $107m

The International Finance Corporation (IFC), which is the single largest shareholder in Net1, could force the company to buy back its 10-million Net1 shares at a total cost of $107m.

An agreement reached between Net1 and the IFC in April 2016, when the IFC purchased an 18% stake in Net1, allows the IFC to sell the shares back to Net1 if Net1 is the subject of a governmental complaint (or a court judgment) relating to allegations of corruption or fraud. The terms of the agreement and details of the put option were filed with the US Securities and Exchange Commission in 2016 and are accessible on Net1’s website.

Asked about the likelihood of Net1 being forced to repurchase the shares, an IFC spokesperson said: “It is not appropriate for any shareholder to address such issues outside of exchange-sanctioned market communication channels.”

Bridget van Holdt, a spokeswoman for Net1, said the company was not responding to questions at this stage as it was focusing on ensuring social grants were paid out on April 1.

Allan Gray’s chief investment officer, Andrew Lapping, said the fund manager had known about the put option since the terms of the deal were filed in April 2016. Lapping said Allan Gray’s approval was not sought and, in terms of US rules, he did not believe it was necessary.

“It’s not an open-ended option, a complaint has to be brought against Net1.” He said that in terms of Allan Gray’s valuation of the company’s business risk, the put option was a net negative. The put option appeared to be a standard part of the IFC’s investment terms.

Although the Constitutional Court has issued two rulings on the South African Social Security Agency’s (Sassa’s) contract with Net1, it has not ruled on allegations of corruption or fraud against Net1. Neither has any other South African court.

The Constitutional Court ruled that the contract was invalid and also referred to substantial procurement irregularities, but this might not be sufficient to enable the IFC to exercise the put option that would force Net1 to buy back the shares. In addition, the court

action being pursued by Corruption Watch, which challenges the legality of a R317m payment by Sassa to Net1 subsidiary Cash Paymaster Services (CPS), implicates Net1, but is directed at the government.

Repaying the $107m investment could create liquidity problems for Net1, particularly if the Constitutional Court forces CPS to relinquish whatever profit it made. In its latest ruling on the matter, the court repeated its earlier ruling that because the Sassa contract was invalid, CPS could not make a profit on it.

Analysts estimate CPS has made about R1bn profit over the five years of the contract.

The IFC is a division of the World Bank and describes itself as the largest global development institution focused on the private sector in emerging markets.

One former finance director, whose company had discussions with the IFC, said he would never allow his company to enter an agreement that favoured one particular group of shareholders over others.

“The IFC likes to have its cake and eat it,” he said.

It is also possible that Section 46 of the Companies Act would prevent Net1 from paying out if the IFC attempted to exercise its right. Section 46 prohibits the directors of a company from making any distribution if it threatens the solvency and liquidity of the company.

The high-profile controversy surrounding Net1’s contract with Sassa comes at a difficult time for the company. It is currently trying to finalise two major transactions involving Blue Label and Cell C, intended to reduce its dependence on the Sassa contract.