Financial Mail - Investors Monthly
Can Brian van Rooyen put the wheels back on Labat?
Labat cancelled a deal that was all but sealed after it became clear that projections would not be met, writes
The difference between what RTG said it would contribute and the numbers that were coming through was stark
t was not supposed to have been this way. A R645m deal to buy a bulk logistics carrier which had taken the better part of a year to conclude should have propelled empowerment investment group Labat Africa into the big time.
But instead of it becoming an important driver of the group’s growth, the deal fell through when it emerged that the business it was buying, Reinhardt Transport Group (RTG), was not going to produce anything close to the earnings it was projecting.
The deal should have been done and dusted at the beginning of the year, but Labat discovered things were amiss soon after one of its nonexecutive directors, Dawood Asmal, was appointed as an executive director in RTG in December, says Labat CEO, founder and former rugby administrator Brian van Rooyen.
On paper, the deal would have been a really good one. RTG was expected to have driven up Labat’s revenue from R12m to R1.5bn and to boost its operating profit from R1.5m to R209m.
With Labat’s empowerment credentials, the combined entity would have been well positioned to win some lucrative contracts.
RTG came to Labat’s attention when Arbor Capital invited it to see a data room — a space used to store confidential data for companies looking to do a sensitive deal — to consider taking it over.
Van Rooyen liked what he saw and a deal was announced on May 19 2015. Prior to this, Labat had issued statements saying it was looking to invest in the transport and logistics sector.
Van Rooyen says the Christmas break led to the company calling off the deal. Dawood, a CA, started at RTG on December 18, just before the holidays, giving him time to better understand the operation.
The deal was to have been pushed through shortly after his appointment. A private placement of shares was supposed to have been concluded on December 23, but because of the time of year and since a bit more time was needed on the part of some of Labat’s black economic empowerment (BEE) shareholders to raise funds, the closing date was postponed to January 8. The shares were to be listed on January 15 and Labat was to be moved to the JSE’s main board from the venture capital market on the same day.
For a brief time things were seemingly going well. On January 8 Labat announced it had raised R375m, which more than covered the R330m needed to close the RTG deal. But on January 15, Labat put out a bland statement that said: “the finalisation of written agreements between the RTG Vendor and BEE groupings was still in process” and that “a further announcement would be published on the Stock Exchange News Service, notifying shareholders of the new listing date and the date of transfer to the main board”.
In other words, the deal that was all but sealed was in doubt, and the group was not moving to the main board for now.
Van Rooyen says that in December and January the group started to see the results coming through from RTG and “it was nowhere near what we expected”.
Two months later, on March 17, Labat made an announcement that RTG’s turnover was “lower
Though Labat, its shareholders and Van Rooyen managed to avoid losing money on the deal, it has had a marked impact
than expected and margins have been impacted negatively”.
Though having a BEE shareholder like Labat was having a positive impact on RTG, it was not enough to offset an expected reversal in its forecast for the year to end August.
The difference between what RTG said it would contribute and the numbers that were coming through was stark. Van Rooyen says the bulk logistics carrier had predicted about R150m in pretax profit for Labat but was then saying it would incur a loss of around R50m.
Labat first said RTG was “fundamentally a good business” and that it was reassessing its arrangement with it, to “restructure cash flows around the transaction that made sense to Labat [and] incoming investors as well as RTG”.
But only five days later there was no talk of RTG being a “fundamentally” good business, when Labat said the deal was off because it had become clear that RTG’s earnings were not going to meet the projections it made in its circular on November 18.
If the deal had gone ahead, it would clearly have been detrimental to Labat and its shareholders.
But how a company with such flawed projections could get so close to being bought out despite a due diligence being conducted by Deloitte prior to the data room inspection remains unclear.
Van Rooyen says that from Labat’s point of view it had taken all the necessary precautions. It had fulfilled the JSE’s and the competition authorities’ requirements and had taken an independent look at RTG, among other steps going through its audit committee and board. “Every check and balance was done. There was no way [the problems] could have been picked up any earlier.” Though he is not saying whether Labat will take any legal action, Van Rooyen does point out that there were people who bought shares in the group specifically because of this deal.
Some shareholders have not had the patience to see whether Labat could work its way through this matter. For instance, Peregrine Equities, which holds Labat shares on behalf of its clients, held 10.32% of the group but has cut this to 3.3% in recent weeks, as the extent of the problems started to become clear.
Labat’s shares have also taken a knock. The group was trading at about R1.20/share just before it said RTG’s returns were lower than expected on March 17. It is now trading at around 38c/share.
Van Rooyen, who holds 40% of the shares in the group, says that though he will be communicating with shareholders in a more formal manner on what the way forward will be, he has “taken every call” a shareholder made to him on the matter.
When asked if shareholders still had faith in him, given the extent of the problems the company had with RTG, Van Rooyen says not only had the company taken every precaution, RTG was not a fly-by-night operation, as it had been around for close to 30 years and for the last ten years had generated well over R1.5bn/year in revenue. It had looked like a good buy.
In fact, one of the major banks had liked the deal so much it offered to fund it in full. “Anyone looking at this transactions would have seen that the cash flow was there, the profitability was there and the contracts were there, and that the company had a long-term history.”
Though Labat, its shareholders and Van Rooyen managed to avoid losing money on the deal, it has had a marked impact. The group is in the process of buying other companies, and it is now taking a closer look at the details of these deals. “Once bitten, twice shy, so now we are taking extra precautions.”
This prudence has already seen Labat decline one attractive opportunity. “We had to walk away from a transaction. It was very lucrative but the risk was just too high.”