The first cut wasn’t the deepest
SPV to assist meat group Best Cut also gets chewed up
IT’S BEEN well documented in Finweek that the demise of meat group Best Cut Holdings took a chunk out of the portfolio value for StratEquity Empowerment Investments 1 (StratEmp) – a vehicle created for BEE investors by the investment arm of AltX-listed StratCorp.
StratEmp’s annual report to end February 2010 details a R23,6m impairment for the investment in Best Cut, which has been suspended on the JSE pending a liquidation application.
Readers may remember that back in 2007/2008 Best Cut battled to pull off a reverse listing with scant (if any) institutional interest in the pre-listing placement.
A paucity of demand in a pre-listing share placement would normally raise a flag. StratEmp, though, ended up the largest shareholder in Best Cut – not only pitching for pre-listing shares but also happily acquiring a large parcel of shares from a key executive shortly after a rather dismal listing on the JSE’s DCM board.
At one stage StratEmp’s holding in Best Cut represented as much as 50% of the investment portfolio.
While it’s bad enough for StratEmp shareholders to learn of a R23,6m impairment on an ill-advised investment, it’s probably downright distressing to learn from the annual report that there are further losses from the association stemming from Best Cut being brought to account.
It appears that during the last financial year, StratEmp floated a special purpose vehicle (SPV) to help Best Cut with trade finance.
There’s no detail on how the SPV – Best Cut Distributors (BCD) – was arranged. But StratEmp discontinued the venture when liquidation proceedings were instituted at Best Cut.
The SPV is now trying to claim “all amounts wrongfully paid” to Best Cut from the liquidator. There’s also the matter of a loan advance to Best Cut and BCD stock held by the liquidator.
With the matter tied up in the liquidation process, the merits of BCD’s claims look uncertain.
It’s ugly stuff, and there’s some desperate utterances: “BCD has furthermore instituted legal action against all debtors who made wrongful payments to Best Cut, as well as the debtor factoring house and other outstanding debtors to recover as much as is possible.”
The bottom line is that StratEmp has impaired BCD’s R3,3m debtor book by R1,6m due to the uncertainty surrounding the liquidation and collection processes.
Once again one has to question the judgment of StratEmp’s directors and asset managers to plum for an SPV arrangement with a company that even to the casual observer was battling for viability from day one.
Much like when the StratEmp shareholders were investors of last resort for Best Cut at listing, one wonders whether Best Cut could conceivably have secured trade finance from a party other than StratEmp.
Finweek has noted previously that Best Cut CEO Thomas Hill and StratCorp CEO David Harington are more than casually acquainted – both serving as directors of a company called Elective Lifestyles Financing.
Moral debates aside, the scorecard shows StratEmp is down some R25m on Best Cut – a rather invidious position for a small investment portfolio of some R100m.
For early BEE investors in StratEmp – now mainly invested in exchange-traded funds and mainstream JSE shares – it could be years before the Best Cut losses are fully recovered.
Whether StratEmp’s grandiose plans for empowerment investment have suffered extensive reputational damage is probably a more serious concern for StratCorp.
It’s difficult to quantify such a matter. StratEmp continues to publish new prospectuses, which suggest client monies are still trickling in.
But the 36 000 monthly subscribers to Stratcorp’s investment subsidiary, StratEquity, paid over only R66m in the year to February 2010 – more than 20% down on 2009’s R84m.