The cost of denial
Group ‘not in a position to discharge its debts’ without rights offer
FOR MONTHS the share prices of clothing/textile conglomerate Seardel have been warning shareholders that something nasty was lurking. The discount between its last stated net asset value of 1700c/share and the share price was nearing R1,3bn – an ominous portent if ever. Yet if you trawl through the archives, Seardel’s board of executives seemed to be in denial about the company’s predicament.
Despite urgent (and persistent) calls by some shareholders for Seardel to unlock value by selling off unviable manufacturing operations and cashing in surplus industrial properties, executives have been happy to back the group’s operational viability despite margins being shredded by a seemingly unstoppable influx of cheaper imported clothes.
Year after year returns on assets and capital remained at unsatisfactory levels, which should perhaps have worried some execu- tives in light of most manufacturing companies thriving in buoyant economic conditions. Whether any executives – particularly the independent non-executives – disagreed with Seardel’s strategy isn’t clear. But no dissenting voices were heard.
But surely there must have been a worry in the boardroom that any dip in economic conditions – as we’ve seen this year – could really shake down Seardel?
Aaron Searll, who recently stepped down as Seardel CEO, persistently punted an operational recovery and resisted calls to unlock the value trapped in the company’s sprawling property portfolio. Searll also defied calls for Seardel to dismantle its N-share structure, which effectively kept the Searll family in control of Seardel.
While the control structure served its purpose of keeping corporate raiders at bay, it also precluded any corporate action that could unlock value for shareholders. German investor Claas Daun – a businessman with the ability to turn around almost any sunset industry – was one party to walk away from Seardel in frustration after building a large (but ultimately ineffective) stake in the group.
Recent trading statements from Seardel (outlining a R100m loss after taking into account restructuring costs of R40m) confirm the group is facing a considerable squeeze. It’s hard to believe it’s the same Seardel that regularly paid out dividends to shareholders and could even afford to mobilise capital for a few large share buybacks.
Seardel’s R300m recently proposed rights offer pitches new shares at a heavily discounted subscription price of 50c/share – terms that suggest a last gasp measure by a board that’s been surprised by prevailing trading conditions. Interestingly, the rights offer price is equal to the collective amount paid in dividends per share by Seardel for the past three financial years.
At 50c/share Seardel – as it stands on the JSE – would be worth less than R50m. In other words, 50c/share is a helluva valuation to place on shares in a company that supposedly holds an intrinsic value of around 1700c/share (roughly R1,6bn) in mainly property-based assets.
So desperate is Seardel that the Searll family, which has doggedly clung to control, has been forced to relinquish its rights in the fund-raising exercise. The Searll family makes way for empowerment investor Hosken Consolidated Investments ( HCI), which will emerge as the new controlling shareholder after acting as the main underwriter in the rights offer.
It seems shareholders will welcome HCI’s intervention. In that vein Finweek has recently punted Seardel as an interesting option at current levels. With HCI on board there can be no doubt that from these bombed out levels there could be some longer-term upside in Seardel – either through improved operational efficiencies or by asset stripping. But for faithful Seardel shareholders the HCI rescue mission via a rights issue can probably not be considered the best option. No doubt more than a few shareholders will be asking why HCI simply didn’t make a direct offer to minorities – especially since the turnaround at Seardel will undoubtedly be a long and arduous process for minorities to endure.
With so much value locked up in its properties, the case for closing down Seardel’s inefficient plant and disposing of large tracts of property is naturally the best (albeit mercenary) way of garnering value for shareholders.
Still, with HCI at the helm, Seardel will probably take a harder look at operations. Talk around town suggests any serious costcutting efforts will see the shutting down of all marginal operations and major job losses throughout the group. That’s a scenario Searll, who founded Seardel in the late Fifties, was keen to avoid.
Naturally, the irony of HCI – a unioncontrolled company – taking charge of such a cost-cutting exercise should be interesting to monitor. Surely it’s the first time the “work-
ers” have backed a rescue effort that could ultimately cut into their own ranks. Clearly, HCI CEO Johnny Copelyn – who serves on the Seardel board – will be performing a tightrope act of note. HCI has already provided (an obviously much needed) lifeline to Seardel, kicking in with a R200m loan that will be capitalised by the rights offer.
Seardel’s rights offer circular makes the scary admission that without recourse to the rights offer the group wouldn’t be in a position to “discharge its debts” should existing facilities and the HCI loan become repayable. After reading that part of the circular you may be forgiven for wondering whether Seardel’s bankers threatened to call in their loans. The circular shows a bank overdraft of R110m needs to be repaid, along with noncurrent interest-bearing liabilities of almost R150m.
No matter, the admission over an inability to discharge debts must be a shocking realisation for the established Seardel shareholder body – many having been banking on a private equity player to tilt at the asset rich group with an offer of between 600c and 800c/share.
As regards the value proposition at Seardel, the rights offer will have quite a pronounced effect on its balance sheet. Last stated NAV of 1700c/share (as at end-June 2007) will be reduced to 264c/share on the back of 660m new shares being issued at 50c/share. But the larger number of shares in issue would infer an NAV of almost R2bn for Seardel. Factoring in the large discount placed on the shares by the market one could presume a post rights issue trading price of anything between 80c and 100c for Seardel. Long-standing shareholders really have no choice but to follow their rights (6,6 new Seardel shares for every one held), unless they want to see their value decimated.
You could well imagine executives coming under fire at the AGM later this year – quite possibly with claims that boardroom dithering had cost shareholders dearly. One shareholder told Finweek the Seardel board should be castigated for wasting shareholders’ money by trying to take sellers out of the market (via share buybacks) and paying high dividends while, in reality, the company was in dire financial straits. “If they’d just kept the cash instead, then they wouldn’t have needed the rights issue now.”
Could any shareholders be considering legal action to claim against the ineptitude of management in protecting and securing value at Seardel? Let’s just say we’ve heard a few murmurings…
No longer involved. Aaron Searll