Taken on trust?
Ithought it might be a while before I saw deal more bizarre than that of Namibian investment company Trustco — which has operations spanning the insurance, banking, property and education sectors — opting to pay R3.6bn in scrip to acquire diamond mining assets with no recent profit or operational track record from its own CEO and controlling shareholder.
But last Friday Trustco hurtled further into corporate weirdness when it proposed selling 20% of its key subsidiary, Legal Shield, to Us-based investment entity Riskowitz Value Fund (RVF) for R1.2bn.
A few things jump right out straight away. The proposed deal infers a value of R6bn for Legal Shield, which owns insurance companies Namibian Trustco Life and Trustco Insurance, as well as an investment segment that includes property, air services and strategic media services. Before the proposed deal was announced, Trustco boasted a market capitalisation of only R4.6bn. So RVF is willing to pay a hefty premium for an unlisted slab of Trustco when it could — technically speaking — acquire 26% of Trustco for the same price.
Now, one must remember RVF is a knowledgeable “buyer”, as the company is more than familiar with the Trustco business. RVF is already a large shareholder in Trustco, with an 8.52% stake. One of RVF’S prime movers is Sean Riskowitz, the CEO of Conduit Capital, an insurance company that also holds a 1.89% stake in Trustco. And then there’s Ithuba Investments LP, another investment entity aligned with Riskowitz, that holds a 16.88% stake in Trustco.
The investment portfolios of these Riskowitz-aligned investment entities got a major fillip last Friday when news of the Legal Shield sale sent Trustco shares up more than 40% — albeit on trades of less than 100,000 shares.
It’s worth pointing out that RVF’S exposure to Trustco also involves a recently arranged R250m convertible loan agreement. This loan will be converted into 58.8m Trustco shares at a conversion price of 425c/share.
The official rationale for the deal, to my mind, seems rather unconvincing. Trustco pointed out the blatantly obvious when noting that the sale of a 20% shareholding in Legal Shield would not change the control of the company or of Trustco itself.
The company also stated that the Rvf-legal Shield transaction would “provide future investors the opportunity to invest directly into asset classes that are geared to their specific portfolios”. It added that the deal would significantly increase the available liquidity in Namibia, with the R1.2bn deployed to accelerate growth in the other business segments.
But probably the most eyebrow raising sentence in the Sens announcement concerns an agreement between Trustco and RVF that gives Legal Shield the right to declare a dividend of R1.1bn before the transaction closes.
Well, alright then . . . The possibility of such a monumental windfall seems as remote as a December deluge in drought-stricken Cape Town. At last count, Trustco’s cash generated by operations was R432m, while net cash flow from operational activities was negative to the tune of R73m. Cash on hand was a princely R33m. Surely such a dividend can’t realistically be contemplated — unless Legal Shield is set to sell assets, such as a large chunk of its property portfolio?
Risk appetite
At this juncture, market watchers may regard RVF — which is also underwriting debt-laden fast-food group Taste Holdings’ latest rights issue — as, to put it politely, an adventurous investor.
It’s worth noting that the terms of the deal stipulate that RVF set down R600m upfront without an immediate due diligence. But there is a provision that the transaction can be limited to a 10% stake or reversed in October 2018 if the US investment entity is not satisfied with the due diligence scheduled for January.
I will be paying particular attention to Trustco’s upcoming results — especially the cash-flow statement.
RVF is willing to pay a premium for 20% of an unlisted slab of Trustco when it could acquire 26% of Trustco for the same price