The cost of de­nial

Group ‘not in a po­si­tion to dis­charge its debts’ with­out rights of­fer

Finweek English Edition - - Companies & Markets - MARC HASENFUSS march@fin­

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

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