Conflict of interest at R&E and JCI
Shareholders’ complaints ignored
IT’S NO SURPRISE THAT THE arbitration between Randgold & Exploration and JCI has dragged on longer than expected, and although the latest statement from arbitrators Schalk Burger, Charles Nupen and Harvey Weiner is deliberately studied and judicious, reading between the lines it’s clear that so far all the odds are in favour of R&E.
To drive the point home, for those who have difficulty with small print, the arbitrators put out a “postscript” to their statement, saying that “the R&E claims, if successful, will exceed the net asset value of JCI”. If you think that “if successful” is a major qualification, in the main body of the report they say: “It appears to us that the value of sustainable claims might well exceed the NAV of JCI.”
In layman’s language, that confirms that JCI is bust.
In the JCI interim statement published last September, its net assets were put at R810m. The arbitrators now suggest that a figure of R1,2bn to R1,5bn for R&E’s claim would be a “realistic starting point” for discussions of a settlement. So that leaves a deficit of at least R400m.
However, the mediators also point out that protracted arbitration and the “spectre of liquidation” are commercially and practically unattractive to shareholders of both companies – a remarkably public-spirited approach from members of the legal profession.
They therefore suggest that the best solution is a share-swap merger, and they’re aware that the CEO and FDs of both companies have discussed possible terms.
Now this is where it gets interesting. Peter Gray is CEO of both companies. Johan Lamprecht, FD of JCI, was replaced in the same capacity at R&E by Marais Steyn as recently as 13 December 2006.
There have been repeated, even strident, complaints of conflict of interest in the overlapping directorates of R&E and JCI, which are substantiated by the splitting of the roles of FD. Gray has consistently said that he sees no conflict, but would reconsider if it emerged.
Surely that is now the case? How can he negotiate with himself on both sides of a possible share-swap takeover?
The mediators say that any settlement proposal that leaves no value for JCI shareholders is “unrealistic” and “a poor alternative for JCI to litigation”. After all, it can’t end up with less than the nothing it’ll start with, so it might as well hope that some unpredictable judge will make an inexplicable finding in its favour.
But consider the figures. Pre-suspension market caps were R666m for R&E and R356m for JCI. R&E owns 37,6m shares in JCI, but at R6m they’re a tiny part of its most recently disclosed total net assets of R1,5bn. Given the likely sustainable claim by R&E against JCI (incidentally, it’s significant that JCI has made no counter-claims on R&E, despite earlier bluster), a ratio based on presuspension market caps would be absurd.
In layman’s language, that confirms that
JCI is bust.
Indeed, putting any value on JCI is a generous act. The trick will be to pitch a ratio that minimises the dilution to R&E but is just enough of an inducement to JCI not to litigate.
In my view, anything that gives ex-JCI shareholders much more than 10% of the merged company would be excessive. But this is a story that’s far from over.