It seems plain crazy

There must be a dozen bet­ter ways to in­vest R60m

Finweek English Edition - - Companies & Markets - MARC HASENFUSS

BLACK EM­POW­ER­MENT GROUP Sekunjalo In­vest­ments could in­vest an amount of as much as 20% of its mar­ket cap­i­tal­i­sa­tion into its long-suf­fer­ing health­care sub­sidiary. Sekunjalo last week con­firmed it could in­ject as much as R60m to un­der­write a rights of­fer for Sekunjalo Health (SH) – a rights of­fer that might not draw too much in­ter­est from other SH share­hold­ers (in­clud­ing in­sti­tu­tions such as Old Mu­tual, with 20,88%, and San­lam, with 12,56%).

At face value Sekunjalo’s de­ci­sion seems plain crazy. SH, which is 35% owned by Sekunjalo but 100% funded by the em­pow­er­ment group, has per­formed dis­mally over the past few years. Some cyn­i­cal ob­servers feel its health busi­ness has be­come an emo­tional is­sue, be­ing the an­chor busi­ness when chair­man Iqbal Survé co-founded Sekunjalo in the mid-Nineties.

The fi­nan­cial year to end-Au­gust 2007 saw rev­enue of R37m turned into an op­er­a­tional loss of R40m, while the in­terim pe­riod saw turnover of R15m crash R20m into the red. Look­ing at those fig­ures, SH doesn’t look a vi­able propo­si­tion by any stretch of the imag­i­na­tion.

SH’s bal­ance sheet makes it abun­dantly clear why a rights of­fer has been pro­posed. Ba­si­cally, with­out fresh cap­i­tal SH won’t stay afloat and, un­der­stand­ably, Sekunjalo was prob­a­bly not keen to con­tinue its fund­ing obli­ga­tions with just a 35% share­hold­ing. As at end-Fe­bru­ary this year, li­a­bil­i­ties of nearly R200m dwarfed as­sets of R56m (in­clud­ing phar­ma­ceu­ti­cal dossiers of R21m). Even af­ter strip­ping out R130m in bor­row­ings owed to Sekunjalo, SH finds it­self in a se­ri­ous pinch, with cur­rent as­sets of R21m not even cov­er­ing its bank over­draft of R24m (never mind the other R20m in cur­rent li­a­bil­i­ties). Its net li­a­bil­ity count is R137m, which is ridicu­lous for a com­pany that didn’t even gen­er­ate R40m in turnover in its past fi­nan­cial year.

Sekunjalo has based its op­er­a­tional come­back on cash-gen­er­a­tive in­vest­ments

in fish­ing and tech­nol­ogy and in that re­gard share­hold­ers may won­der if un­der­writ­ing the SH rights is­sue isn’t a costly dis­trac­tion. It’s cer­tainly worth ask­ing whether it would not be bet­ter for Sekunjalo to close up or sell off SH – re­mov­ing a ma­jor drag on the group’s other op­er­a­tional as­sets.

It will also be in­ter­est­ing to see if in­sti­tu­tional share­hold­ers such as Old Mu­tual and San­lam fol­low their rights. It might be dif­fi­cult to jus­tify to clients that SH is a busi­ness worth throw­ing more money at. The rights of­fer closes this Wed­nes­day, so the po­si­tion of Old Mu­tual and San­lam will be known by latest Fri­day.

It seems Sekunjalo’s de­ci­sion to back the rights is­sue to the hilt is based on hopes of an op­er­a­tional turn­around at SH. Ac­cord­ing to the cir­cu­lar, SH’s phar­ma­ceu­ti­cal di­vi­sion is look­ing at new dis­tri­bu­tion chan­nels and in­creas­ing its prod­uct port­fo­lio to build crit­i­cal mass and, hope­fully, mean­ing­ful prof­its. Its man­u­fac­tur­ing di­vi­sion, which has been smacked by com­pet­i­tive im­ported goods, has re­cently been awarded a num­ber of new ten­ders.

The big­gest short-term gain for SH could be from its IT busi­ness, which pro­vides a variety of health-re­lated tech­nol­ogy ser­vices, mainly to Gov­ern­ment. Talk is that di­vi­sion will be “sold” to Sekunjalo’s prof­itable in­for­mat­ics divi- sion, which has in­di­cated will­ing­ness to list shortly. Hope­fully, the wind­fall of such a sale (as­sum­ing it’s a cash-based deal) could fur­ther shore up SH’s bal­ance sheet post the rights is­sue.

But can SH’s phar­ma­ceu­ti­cal and man­u­fac­tur­ing busi­nesses re­ally gen­er­ate the kind of re­turns that would jus­tify Sekunjalo stick­ing in as much as R60m? At this junc­ture you can’t help feel­ing – even with new dis­tri­bu­tion chan­nels and new ten­ders – its health busi­nesses look a tad light­weight.

It may be wor­ry­ing to note that af­ter the rights is­sue the fi­nan­cial ef­fects ap­plied as at end-Fe­bru­ary this year would still have seen SH op­er­at­ing at a se­ri­ous loss and show­ing a neg­a­tive net as­set value.

The only ad­van­tage of pitch­ing in R60m is that Sekunjalo – pre­sum­ing most share­hold­ers don’t fol­low their rights – will gain out­right con­trol of SH. That should al­low Sekunjalo to work more ef­fec­tively with SH, not hav­ing to re­vert strate­gic de­ci­sions back to other large share­hold­ers. In that re­gard Sekunjalo may well be able to pur­sue cor­po­rate ac­tion, which may well be the only way to build up SH into a mean­ing­ful and prof­itable en­tity.

But the bot­tom line is that to most ob­jec­tive ob­servers there would prob­a­bly be a dozen bet­ter ways to in­vest R60m than prop­ping up an un­der­sized, ail­ing and un­con­vinc­ing health­care busi­ness. Sekunjalo, which earns R1,5m from an un­der­writ­ing fee, will have a lot to prove at SH over the next few years…

An emo­tional is­sue. Iqbal Survé

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