AYO’S ‘FANCIFUL’ FORECASTS
Ayo Technology Solutions’ plan to capture as much as 8% of South Africa’s ICT market was not without substance. But at least one expert claims its revenue forecasts were more than a little overblown. If true, this may strengthen the PIC’s R4.3bn claim against the company
“Unrealistic and fanciful.” That’s how accounting expert Harvey Wainer describes the forecast contained in Ayo Technology Solutions’ prelisting statement (PLS) — the statement used to persuade the Public Investment Corp (PIC) to splurge a hefty R4.3bn on the previously unknown company in December 2017.
Wainer was giving evidence in the civil case the PIC has launched in an attempt to claw back those billions, as well as some interest. The country’s largest asset manager, which invests on behalf of government employees, claims that Ayo (previously Sekunjalo IT Investment Holdings) misrepresented what it intended to do with the funds, and overstated its crucial relationship with British Telecoms South Africa (BTSA).
The PLS forecast that revenue for the 12 months to end-March 2019 would be 16 times higher than that achieved in 2017, and the operating profit would be 1,865% up on 2017.
“The extraordinary, remarkable forecasts for 2018 and 2019 in the PLS were said to be attributable primarily to Ayo taking over some of BTSA’s customers and to Ayo increasing its market share,” said Wainer, who was evidently sceptical that such “fantastic growth” was to be achieved without any groundbreaking technology or major acquisitions of large businesses.
The fantastical plan, launched in mid-2017 by African Equity Empowerment Investments (AEEI), 61.86% held by Iqbal Survé-controlled Sekunjalo Investments, was to capture as much as 8% of the country’s ICT market by
2022. According to the PLS, in 2017 that market was worth about R174bn.
The weapons to be used in that capturing were primarily AEEI’s BEE credentials and its 30% stake in BTSA. And, while the magnitude of the forecast might have been unrealistic, the basis of the proposal was not without substance.
As former BTSA CEO Kevin Hardy explained to the Mpati commission of inquiry into alleged impropriety at the PIC in 2019, the new broad-based BEE ICT charter, released in early 2017, quickly became a competitive advantage for those who managed to transform, and a significant disadvantage for those who didn’t.
“I proposed a transformational model to BT whereby BT would wholesale its services through black-owned enterprises,” Hardy said in a statement to the commission.
“BT was very clear that its reputation and its impeccable track record needed to be kept intact and that all models need to remove the possibility of any fronting risk and satisfy competition law requirements.”
The “innovative and transformational model” was presented to Sasol, which was one of BTSA’s largest customers at the time and was keen to upgrade its BEE credentials.
Given that AEEI had been BTSA’s BEE shareholder since 2008 and that Sekunjalo IT had a few assets, Hardy said it made sense to partner with the company for this project. “BT’s global
What it means: capability with a strong local partner was a very good proposition to the market and excited a lot of our customers who wanted to leverage BT’s global capability through a locally empowered entity,” Hardy told commission chair and retired judge Lex Mpati.
In early July 2017, Hardy sent details of the proposal to Survé. In September Survé persuaded Hardy to join his group as CEO of the newly named Ayo. Hardy said his BT bosses were happy with the move, as it meant BT would have somebody they knew and trusted leading Ayo.
Though Hardy says BT was committed to doing a deal with Ayo, BTSA CEO Bertrandt Delport told the Western
Cape High Court recently that the deal it initially envisaged was limited to the Sasol business.
Back in late 2017 it was apparent that some form of partnership with BT was considered essential if the Ayo listing was to go ahead. But things on that front were not going as fast as AEEI wanted. Hardy told Mpati that he leveraged his relationship and credibility with BT to fast-track its backing. “The alliance agreement [with BT] was eventually signed on December 12 2017,” just 11 days before Ayo was listed.
The PLS referred to AEEI transferring its 30% stake in BTSA to Ayo “after the listing”. The R900m price tag on the stake would account for a large chunk of the R4.3bn coming from the PIC.
The rush to get the listing completed as soon as possible was, according to evidence provided to the Mpati commission, to secure the PIC funding before the ANC elective conference in December 2017, which could have led to changes in the PIC leadership in particular the removal of PIC head Dan Matjila.
And so, with the listing completed, in early January 2018 Hardy set about building a large ICT business. “Ayo had nothing really other than the existing businesses in the group and we needed to start from scratch,” said Hardy, who reckoned that only two of the several businesses listed in the PLS were of much substance. Offices were set up, staff employed and a response prepared to Sasol’s request for proposal.
A spokesperson for Ayo tells the FM that Ayo took more than 70 staff from BTSA “to build Ayo and offer services to BT customers, as well as new customers to build Ayo to [become] the biggest ICT black product and services provider in South Africa”.
The PIC is trying to claw back R4.3bn it invested in Ayo Technology Solutions, claiming misrepresentation on the part of the ICT company
In July 2018, after completion of a successful three-month transition project, the Sasol contract was finalised. But just a month later, Hardy, who seemed increasingly troubled by the way the controlling shareholder was handling Ayo, quit. He was one of five directors to resign at that stage.
And then, just over a year later, Sasol gave notice that it was cancelling the seven-year R2.3bn contract effective March 2020.
Neither party will comment on the reasons for this, but it’s instructive that Ayo’s challenge to Sasol’s right to cancel the agreement was unsuccessful. While reputational issues may have played a role, an industry expert says, given the size and complexity of Sasol’s business, it would have needed an established and extremely competent service supplier.
Meanwhile, BT had blocked the transfer of the 30% BTSA stake to Ayo and in June 2021 the British group initiated the process of terminating its relationship with the Sekunjalo group. That process is still under way.
Ayo reckons much of its woes since listing can be put down to the media. Its spokesperson refers to “false reporting [and] negative, biased articles where fiction has become fact”.
Which brings us back to Wainer’s “unrealistic and fanciful” diagnosis. The accounting expert said that even with all of BTSA’s business included, he couldn’t see how Ayo would have made the sort of numbers it put in its PLS forecast.
For the year to March 2018, BTSA’s revenue was R1.4bn and its operating profit R261m. The BTSA figures, which were not included in the PLS, reveal that even the whole of BTSA was “very small relative to the PLS forecast”, Wainer told the court. It also indicates that the R900m price tag on AEEI’s 30% stake was on the steep side. Ayo was forecasting revenue of R7.7bn and operating profit of R1.3bn for financial 2019.
If the PIC can persuade the court that Ayo’s PLS forecast was “unrealistic and fanciful” it will be one step closer to proving intentional as opposed to negligent misrepresentation, which would allow it to rescind the R4.3bn investment contract.
Inevitably there’s an element of uncertainty in any PLS forecast, as Ayo itself points out in the early pages of the document. “By their nature, forwardlooking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.”
The forward-looking statements are based on estimates and assumptions, warns Ayo, adding: “Though Ayo Technology believes them to be reasonable, they are inherently uncertain. Such estimates, assumptions or statements may not eventuate.”
So, it’s not as though the PIC wasn’t warned. Whether the warning was sufficient in the context of an “unrealistic and fanciful” forecast is another matter.
And then there’s the issue of what Ayo said it intended doing with the proceeds from the listing, and what it actually did.
After deducting expenses of R77.3m (R57m of which went to AEEI Corporate Finance), the proceeds were going to be used to “fund the rollout of the BT strategic relationship”, “to fund Ayo Technology’s acquisition pipeline and to fund the R900m acquisition of the 30% stake in BTSA”.
So, the rollout of the BT relationship didn’t happen, and neither did the acquisition of the BTSA stake which leaves the acquisition pipeline. Certainly, Ayo has been buying up lots of businesses but, given they are unlisted and some transactions involve related parties, it’s difficult to know what value to attribute to them. Its own auditors have flagged a number of valuation concerns as key audit matters.
One thing that is known with certainty is that, despite its poor operational performance, Ayo has been a generous dividend payer. Over the past four years it has paid out more than R1bn to shareholders. The PIC is reported to have received R400m in dividends, which is nice enough but it’s a long way off the R4.3bn plus interest the asset manager is now looking for.