Tilting for a share of African Phoenix’s nest egg
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’
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 …