Tilt­ing for a share of African Phoenix’s nest egg

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The very peo­ple ‘ac­cus­ing’ Cil­liers of op­por­tunism bought ordinary shares in API be­cause they saw the same op­por­tu­nity Cil­liers did

African Phoenix In­vest­ments (API) says it can’t pay Al­bie Cil­liers the R83.55 a share he be­lieves is the ap­pro­pri­ate redemp­tion value for the API pref­er­ence shares he holds.

The rea­son is that if it paid Cil­liers that money it wouldn’t have enough to play its own game. It wants the money to pur­sue its own strat­egy, which ini­tially in­volved set­ting up a black-con­trolled fund man­age­ment com­pany, though the plan seems in the process of be­ing rad­i­cally re­vised.

API is ac­cus­ing Cil­liers of be­ing an op­por­tunist; it says he only pur­chased the pref­er­ence shares be­cause he be­lieved there would be an op­por­tu­nity to make a lot of money from them. This is a bor­der­linebizarr­e ac­cu­sa­tion to make in the world of in­vest­ment, where peo­ple are ex­pected to buy some­thing only if they be­lieve it will ap­pre­ci­ate in value. If your in­vest­ment ad­viser is not do­ing that you should fire them, im­me­di­ately.

But it’s dou­bly bizarre in this in­stance be­cause the very peo­ple “ac­cus­ing” Cil­liers of op­por­tunism bought ordinary shares in API be­cause they saw the same op­por­tu­nity Cil­liers did. In­deed, many of them saw the op­por­tu­nity only af­ter Cil­liers. API was born out of the ashes of African Bank In­vest­ments Ltd— hence the name Phoenix. When it emerged from busi­ness res­cue in 2016 it was a cash shell with R1.59bn at its dis­posal, of which R462m was at­trib­ut­able to ordinary share­holder eq­uity and R1.13bn to pref hold­ers.

The 13.5-mil­lion pref­er­ence shares were is­sued by Abil in the 10 or so years be­fore its im­plo­sion in 2014. Af­ter a sus­pen­sion of 2½ years, in Fe­bru­ary 2017 JSE trad­ing re­sumed in what is now called API.

By that stage al­ready there were in­di­ca­tions that the API ex­ec­u­tive team was in­tent on squeez­ing out the pref­er­ence share­hold­ers and us­ing the R1.13bn to finance their new plans for the in­vest­ment hold­ing com­pany. De­spite be­ing a sig­nif­i­cant source of cap­i­tal the pref hold­ers were not given a voice at in­vestor meet­ings, but they were made aware that div­i­dend pay­ments would not be re­sumed. For the many in­come funds that had bought the prefs years be­fore in an­tic­i­pa­tion of reg­u­lar div­i­dends, and which had sat through the 30-month sus­pen­sion, this was a ma­jor blow. Un­sur­pris­ingly, news of the div­i­dend pol­icy en­sured the pref share price traded well be­low face value.

Things sort of am­bled along un­til the sec­ond half of 2017 when Value Cap­i­tal Part­ners (VCP) emerged as a sig­nif­i­cant (ordinary) share­holder and started to shake up the board. Then in March 2018 Steyn Cap­i­tal Man­age­ment (SCM) ap­peared as the owner of 25.38% of API. The board shake-up moved up a few notches. Within a few months it was ap­par­ent that VCP, with the ap­par­ent back­ing of SCM, as well as the Public In­vest­ment Corp, which holds 15% of

API, was driv­ing plans to launch a black-con­trolled and -man­aged pri­vate eq­uity-type fund.

In early Septem­ber 2018 came the first for­mal in­di­ca­tion that the API board was go­ing to use the R1.6bn cash on its bal­ance sheet to launch its black pri­vate eq­uity fund, API Cap­i­tal Fund, which would be man­aged by a black-owned fund man­ager.

The fund man­ager was to be paid a man­age­ment fee of 1% of the API fund’s in­vested NAV with a min­i­mum fee of R19m for the year to end-Septem­ber 2019 and an in­fla­tion-linked in­crease there­after. In ad­di­tion to a man­age­ment fee, the fund man­ager would be en­ti­tled to an an­nual per­for­mance bonus and a share al­lo­ca­tion ev­ery six years.

API told its share­hold­ers the fund would pro­vide them with ac­cess to “unique in­vest­ment op­por­tu­ni­ties not typ­i­cally avail­able to public mar­ket in­vestors”. Sadly for the pref share­hold­ers, they were not go­ing to get a look into this “unique” op­por­tu­nity.

Cen­tral to the whole plan was the pro­posal to re­pur­chase the pref­er­ence shares at R37 each and can­cel them; a plan that had ap­par­ently been agreed af­ter con­fi­den­tial dis­cus­sions with cer­tain of the ma­jor share­hold­ers.

Not all the share­hold­ers were en­thralled by the prospect of this unique op­por­tu­nity. Dur­ing a tele­con­fer­ence to dis­cuss the pro­posal with share­hold­ers, one re­ferred to the grim per­for­mance of African Rain­bow Cap­i­tal, which was trad­ing at a hefty dis­count to its NAV, though, as part of Pa­trice Mot­sepe’s em­pire, it had ac­cess to sub­stan­tially more funds and in­vest­ment op­por­tu­ni­ties.

De­spite push­back from some share­hold­ers, API man­age­ment pro­ceeded with its plans to build up a “deal pipe­line”. In Fe­bru­ary 2019 VCP dis­closed it had in­creased its ordinary eq­uity hold­ing to 15.15% and CEO Sam Sit­hole added shares to his own port­fo­lio in Fe­bru­ary and March.

Also in March, tagged onto the AGM, was the share­hold­ers’ meet­ing to vote on the pro­posed pref re­pur­chase. It was a re­mark­ably con­trived af­fair with so lit­tle re­gard for the rights of the pref share­hold­ers it is puz­zling how the JSE gave it the go-ahead.

As it hap­pens, 77% of the 71% of pref share­hold­ers at­tend­ing the meet­ing voted in favour of the re­pur­chase, just 2% more than was needed to push it through. The court sanc­tioned the scheme in early June on an un­op­posed ba­sis.

It’s im­por­tant to note that a large chunk of those sup­port­ing the scheme also held ordinary shares and so stood to be net ben­e­fi­cia­ries of a deal that was es­sen­tially trans­fer­ring R610m from pref hold­ers to ordinary share­hold­ers.

The quar­terly up­date re­leased in early Septem­ber re­vealed just how suc­cess­ful the trans­fer of wealth had been. The NAV of API’s ordinary shares in­creased to 94c at end­June from 53c at the end of March, and pref share­hold­ers’ eq­uity was down to zilch.

From there it should have been plain sail­ing for the ex­ec­u­tive team, which was on track for a guar­an­teed R19m min­i­mum an­nual fee. But two ma­jor chal­lenges quickly came

De­spite push­back from some share­hold­ers, API man­age­ment pro­ceeded with its plans to build up a ’deal pipe­line’

into fo­cus.

Share­holder ac­tivist Cil­liers ex­er­cised his ap­praisal rights and, within weeks of the court’s June ap­proval of the re­pur­chase, Sit­hole re­signed from the API board.

Shortly af­ter Sit­hole’s de­par­ture there was a sig­nif­i­cant change in the share­holder pro­file as VCP, Coronation and Al­lan Gray sold out to new­comer Zar­clear, headed by CEO Warren Chap­man.

In early Septem­ber Chap­man, who had just paid R246m for the 21.8% API stake, made his in­ten­tions clear. He wanted to call a halt to the plans for a black-man­aged pri­vate eq­uity fund and in­stead dis­trib­ute all the cash to API share­hold­ers. As­sum­ing Chap­man has the back­ing of SCM, it might be easy enough to kill off the pri­vate eq­uity plan as it only re­quires an ordinary res­o­lu­tion. A share­hold­ers’ meet­ing has been called for mid-Novem­ber.

So there are now two prece­dent-set­ting bat­tles play­ing out on the rel­a­tively lit­tle­known API stage.

Even more re­mark­able is that of the two the more com­pli­cated could be the one launched by Cil­liers. Cer­tainly un­til his chal­lenge is set­tled it is dif­fi­cult to see how API could dis­trib­ute all its cash.

As things stand, set­tling Cil­liers’ ap­praisal rights claim could take a few years. Com­par­a­tively well-re­sourced en­ti­ties, such as API, have done what well-re­sourced en­ti­ties al­ways do when chal­lenged: they haul in the lawyers. This has the po­ten­tial not only to in­tim­i­date Cil­liers but also get him tied up in le­gal costs that could eas­ily crip­ple him. (This is a crit­i­cal is­sue that reg­u­la­tors that want to pro­tect the rights of re­tail in­vestors should bear in mind when draw­ing up reg­u­la­tions in fu­ture.)

Those who know him say Cil­liers, who has al­ready made le­gal his­tory with a suc­cess­ful ap­praisal chal­lenge at KWV, is not eas­ily in­tim­i­dated but would be concerned about ex­pen­sive stalling tac­tics.

API has al­ready forced Cil­liers into se­cur­ing the ser­vices, pre­sum­ably costly, of an in­de­pen­dent expert to ad­vise him on the “fair value” of his pref shares. That expert will now have to face down the two in­de­pen­dent ex­perts that API has on its side, EY and Har­vey Wainer.

In essence the API team con­tends that the mar­ket price, when it was still trad­ing, rep­re­sented the fair value of the prefs; Cil­liers coun­ters that the mar­ket price was a con­se­quence of the com­pany’s de­ci­sion not to pay div­i­dends and that the fair value is closer to R83.55. At stake, says Cil­liers, is the in­tegrity of the pref share mar­ket, which re­lies on in­vestors know­ing that for the in­creased risk they as­sume they en­joy greater pro­tec­tion over the redemp­tion value of their in­vest­ment.

Some­how it doesn’t seem right that a small re­tail in­vestor has to bat­tle to pro­tect the in­ter­ests of a far larger sec­tion of the mar­ket. ●

Those who know him say Cil­liers, who has al­ready made le­gal his­tory with a suc­cess­ful ap­praisal chal­lenge at KWV, is not eas­ily in­tim­i­dated

Al­bie Cil­liers …

Pic­ture: 123RF — TASHATUVAN­GO


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