Debit order investors bail it out
IN MARCH ????? this year Finweek noted that Pretoria-based financial services group StratCorp (“StratCorp’s easy money”) had managed a most amazing feat in raising half its market capitalisation in a shares-forcash issue. At that stage we were keen to identify the “public shareholder” willing to inject R27,5m into StratCorp by subscribing for 57,3m new shares at 48c/share.
After all that the “public shareholder” effectively became the largest single shareholder in StratCorp and was awfully brave to fork out a substantial sum to a struggling company at a time when capital is scarce. We can deduce from StratCorp’s latest annual report that StratCorp Empowerment Holdings (SEH) – now listed as the company’s largest shareholder, with a 34,69% stake – took up those 57,3m shares.
An obvious question would be how a single shareholder could possibly garner such a large stake in StratCorp in a sharesfor-cash issue – an exercise that traditionally would result in 3% to 10% of any listed company passing into the hands of several institutional-type investors.
But StratCorp passed a resolution at its AGM last year allowing directors to issue up to 50% of its issued share capital. In the SEH transaction it seems StratCorp’s directors issued as many shares as they possibly could to a single investor without triggering a mandatory offer to its remaining shareholders. Finweek notes a similar resolution is on the cards for StratCorp’s AGM next month.
At first glance you might be forgiven for thinking SEH was a related party – especially since CIPRO shows the company’s directors include several active and resigned directors who are also former directors and current directors of StratCorp.
However, StratCorp CEO David Harington stresses SEH isn’t in any way related to StratCorp. He suggests CIPRO’s information is incorrect. However, Harington declined to identify the investors or personalities behind SEH.
While the emergence of a new major shareholder is a significant development, a perhaps more critical consideration is what StratCorp’s financial statements would have looked like without that R27,5m cash injection. In that regard you must remember the R27,5m was “booked” on 27 February this year – a day before StratCorp’s financial year-end.
Clearly, StratCorp needed fresh capital as its operational cash flow was negative to the tune of R23m over the year. The fact of the matter is that StratCorp’s cash pile – after the R27,5m cash injection from SEH – was just more than R2m at its financial year-end. In other words, without the shares-for-cash issue StratCorp would have been in a rather hefty overdraft position.
It seems the problem with cash flow is that StratCorp has more than R50m tied up in “inventories”. Those “inventories” relate to StratCorp’s property developments, which naturally can only be banked once they’re sold. It’s clearly a tough market out there in residential real estate…
After perusing StratCorp’s annual report it’s difficult to comprehend that a single investor would find sufficient reason to buy so confidently into a struggling business. A critical question would be whether the arrangement between StratCorp and SEH was mutually beneficial. Judging from StratCorp’s annual financial statements you could suspect StratCorp needed the cash from SEH a whole lot more than SEH needed an opportunity to buy shares in StratCorp.
Finweek managed to track down Mike Tshishonga, who was still listed as an active director of SEH. Tshishonga – a former StratCorp director – was the former deputy director-general at the Department of Justice who blew the whistle on former Justice Minister Penuell Maduna’s relationship with liquidator Enver Motala.
Tshishonga says SEH comprises mainly black investors who contribute investment sums on a monthly basis. Interestingly, StratCorp subsidiary StratEquity uses a similar modus operandi to collect monthly instalments from mainly black investors who are then invested in listed shares and exchange-traded funds via StratEquity Empowerment Investments.
StratCorp’s annual report shows StratEquity has in excess of 44 000 monthly subscribers on its books, and total investment funds received from clients during the year to end-February 2008 increased to R84,4m.
StratEquity also has to take credit for putting a large chunk of its investment monies collected by monthly debit order for StratEquity Empowerment Investments into recently listed meat producer Best Cut Holdings – an illiquid company that’s seen its shares fall heavily after poor operating performances.
SEH – while evidently not related to StratEquity – looks a similar collective investment, save for the fact it appears to have (so far) only one major listed investment. Most collective investment schemes – unit trusts, being the best known – that take investment contributions on a monthly basis usually invest in a variety of shares or asset classes to mitigate risk. At this point it looks as if SEH will also be a passive investor in StratCorp.
The notice convening StratCorp’s AGM shows no representatives from SEH have been nominated as board members. A shareholder body holding more than 33% of a listed company would certainly covet one or two board seats… Naturally, you then have to ask who acts and speaks on behalf of those “scheme shareholders”? Tshishonga – a current director of Best Cut – says he and StratCorp non-executive director Mikesh Patel look out for the SEH investors. Tshishonga says he’s passionate about building black empowerment and hopes one day StratCorp will reward SEH’s shareholders with a dividend.
Despite Tshishonga’s reassurances, it’s curious the parties charged with managing the SEH funds couldn’t have found a better – less risky – investment proposition than StratCorp. No disrespect to StratCorp, but this small cap company can’t exactly be regarded as perfect fodder for “widows and orphans”.