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

Financial Mail - Investors Monthly - - Front Page - Larry Claasen

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.”

Dis­ap­point­ment … the bulk lo­gis­tics car­rier had pre­dicted about R150m in pre­tax profit but later said it would in­cur a loss of around R50m

Brian van Rooyen … some peo­ple bought shares in the group specif­i­cally be­cause of the deal

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