Frustration behind failed R1bn purchase

Trustco and Constantia, two financial services companies based in SA and Namibia, had ambitious plans to create a diversified and integrated group that would offer property, insurance and lending across the two markets.

Conduit and Trustco, controlled by business associates Sean Riskowitz and Quinton van Rooyen, in February 2020 announced a deal that proposed Conduit ’ s insurance subsidiary, Constantia, would buy Trustco subsidiary Herboths Property Development for R1bn. Riskowitz owns about 23% of Trustco.

The deal fell through in March 2021 after the JSE refused to approve a circular that could have cost shareholders dearly.

Business Day can now reveal the behind-the-scenes discussions and frustrations, much of which centred on a difference in the value of Herboths as contained in Trustco’s 2020 financial statements and valuation reports.

The JSE was quick to reject a proposed circular from Conduit — a crucial step in any major transaction since it enables investors to make informed decisions and regulators to ensure compliance — because it did not contain the financial statements of Trustco, which places a much lower valuation on Herboths.

Under the terms of the deal, Constantia, which is now in liquidation, would pay Herboths a

R50m refundable deposit, and Trustco would also take up a 32.2% stake in Constantia.

“Whilst we understand that the Covid-19 lockdown may cause delays in the preparation of the financial information for a transaction, such delays are no basis upon which we can accede to your request to only include the company accounts for Constantia in the transaction circular,” the JSE told Conduit in a letter dated April 14 2020.

The JSE, whose primary concern with the circular was the valuation of the property, demanded that Conduit and Trustco release their respective circulars simultaneously and that their shareholder meetings to vote on the deal be convened on the same day. The approval of the circular was material since shareholder meetings to vote on the deal could not be held without such approval.

With his team trying frantically to get the circular approved and published within two months of the announcement of the deal, Riskowitz assured his team and Van Rooyen that all was well.

“There is no uncertainty that the shareholders won’t support the deals. We have already got signed or to be signed irrevocable from all. We have not been made aware of any objections ... we are of course dealing with fun and games with JSE, which has delayed the circular, but we expect to be free and clear today or tomorrow,” Riskowitz said in an email dated April 7.

At the heart of the deal’s failure was the value of Herboths.

A valuation report, commissioned by Trustco and conducted by Eaton Property Valuations in March 2020 and seen by Business Day, put the market value at between N$335m and N$937m. The Namibian dollar is pegged at parity to the rand.

However, a report by Property Valuations Namibia, commissioned by Constantia, put the property’s market value at N$783m, noting that it consists of 1,600ha of “sellable land”.

In a memorandum dated April 2020, Conduit CFO Lourens Louw advised the deal was fair. However, in its financial statements for the year ended March 2020 Trustco valued the property at N$250m.

In August 2020, Conduit’s sponsor, Mechantec, advised it and Constantia that the JSE had serious concerns over the valuation of the property.

“The JSE are reverting with comments on the circular.

“The first issue (not surprisingly) is the valuation of the land ... there is a discrepancy in the reports as to the zoning. In one place it talks to being an agricultural land waiting for rezoning approval and in another it says approval was obtained in October 2019,” reads the letter dated August 19 2020.

The SA Reserve Bank also expressed concerns about the valuation of the property and Trustco ’ s financial standing.

In a letter dated October 2 2020, the central bank’s Prudential Authority (PA) told Constantia CEO Peter Todd the numbers for the valuation of the property did not add up.

“The PA is concerned around the actual [value] of the property as submitted considering the current Covid-19 circumstances and the impact it had on SA’s economy and Namibia’s economy,” reads its letter.

“The PA is concerned around the financial standing of Trustco Group Holdings as a significant owner of an insurance group and insurers. You are hereby requested to provide the PA with additional information and a detailed motivation why the PA should not be concerned around the financial standing of Trustco ... and that it is in the position to provide capital support.”

In his response a week later, Todd attempted to allay the PA’s concerns around the property’s valuation and Trustco’s financial muscle.

“Property valuations are inherently subject to different assumptions and projections. We suggest that the difference be viewed in terms of percentages and not absolute values ... we believe that there is overwhelming evidence to support our position on the valuation,” Todd ’ s letter reads.

“As of March 2020 Trustco Life held assets of R1bn, equity of R1bn and liabilities of R49m ... we believe this to be ample evidence of the ability of Trustco Life to capitalise or fund Constantia, should the need arise.”

Two months later, though, Todd changed his view on Con

stantia’s valuation of the property, after Trustco published its 2020 financial statements.

“The board is not comfortable with the proposed valuation of the property, as well as the issue of the Conduit shares. The board did not discuss in detail the mechanics of the proposed transaction, although there was some concern about the terms relating to the cash facility due to those conditions being at the sole discretion of Trustco,” he said in a letter to Van Rooyen in December.

Three months later, Constantia cancelled the proposed deal and demanded Trustco return the R50m deposit. The amount was more than Conduit’s market capitalisation of R30m at the time when trading in its shares was suspended by the JSE in 2022 after Constantia — which accounted for 94% of its revenue — was placed in liquidation.

The matter is now before an arbitrator. Constantia is seeking a ruling that the money be paid back, while Herboths has launched a counterclaim, demanding R670m in damages from the embattled firm, arguing it intentionally collapsed the deal.

Herboths in its papers accuses Constantia of providing the PA with incorrect information about the deal, and that the insurance firm was “fully aware of the valuation of the immovable property as reflected in the first respondent’s books of account during or about the time of signing of the agreement.”

Riskowitz did not respond to requests for comment. Van Rooyen responded with profanities when asked about the deal.

Business Day last month reported that insolvency specialist Cloete Murray was gunned down just two days after he launched an urgent application with the high court in his bid to follow the money trail of millions of rand allegedly siphoned from Constantia.

Murray was on the hunt for about R156m missing from the insolvent estate of Constantia.

His other interest was in the R60m “high-risk investment” made in Trustco.