Public Investment Corporation
NEWS ANALYSIS: Iqbal Survé deal highlights fears over Ayo Technology
Sagarmatha seemed set to follow the same script as technology listing
Friday’s extraordinary attack by Independent Media on critics of its executive chairman, Iqbal Survé, follows questions amaBhungane sent to Survé on Wednesday about the listing of another company he controls, Ayo Technology Solutions.
Sagarmatha was due to list on the JSE on April 13, but the listing was aborted after the JSE withdrew its approval, based on Sagarmatha’s technical shortcomings in meeting the listing requirements.
AmaBhungane raised concern ahead of the planned listing, principally about the possibility that Government Employees Pension Fund (GEPF) money, which is managed by the Public Investment Corporation (PIC), would be used to artificially boost the value of Sagarmatha.
Now information has emerged suggesting that fear was well founded — including details of an earlier Survé deal, involving Ayo Technology, which was propped up with R4.3bn in government pension fund cash.
Central to the Ayo and Sagarmatha deals was an offer of shares by Sagarmatha to selected private investors ahead of the proposed listing.
The companies issued prelisting statements, aimed at selected private investors, setting out the performance of the companies and a forecast of their positive prospects.
Sagarmatha and Ayo offered the private placement shares at what were arguably inflated prices. They could do this, seemingly, only because they had a "captive" investor: the PIC.
Ayo had requested the PIC to invest about R4.3bn for 99.8-million shares at R43 per share, which amounted to 29.9% of Ayo, and all of Ayo’s planned private placement. Only the PIC bought these shares at this price before the listing. Ayo and Sagarmatha were effectively controlled by Sekunjalo Investment Holdings, a vehicle for the Survé family trust.
For Ayo, the cascade of ownership is as follows: at the time of the prelisting private placement offer, 80% of Ayo was held by African Equity Empowerment Investments (AEEI), which also owns Premier Fishing and was in fact already listed on the JSE.
AEEI already owned 30% of BT Communications Services SA, the South African arm of British Telecommunications. Sekunjalo, the ultimate ownership and control of which vests in Survé, through his family trust, held 61% of AEEI. This gave the Survé family an effective 48.8% interest in Ayo.
One way of assessing the value of a company is the net asset value (NAV) per share. The NAV is the difference between a company’s assets and its liabilities, although companies are also valued based on their earning potential.
According to the prelisting statement for Ayo, the NAV prior to the restructuring was 15c per share, as of August 2017. In December 2017 the PIC agreed to inject R4.3bn of GEPF money and buy the Ayo stock for R43 per share (for 29% of Ayo).
Ayo then also issued 31.96-million shares to a black economic empowerment (BEE) consortium for R1.50 per share, raising R48m more.
The injection of all that cash raised the NAV from 15c per share to R12.47, an increase of more than 8,000%. Most of that benefit went to the Survé family.
Information emerging from the PIC is not reassuring. The investment proposal for Ayo was tabled at the last moment: on December 20, the day before the due listing date, creating a risk of undue pressure on the investment committee, although the listing eventually took place on January 8
Given the issue of new shares to the GEPF and to the BEE consortium, the effective interest of the Survé family in Ayo dropped from 48.8% to 29.9%. However, the NAV of their interest in Ayo rose from about R16m to R1.3bn.
We put it to Survé and the PIC that this appeared to be a huge and unjustifiable enrichment of one family at the expense of government employee pensions. Survé did not respond to questions, except through his publications, effectively labelling his critics as apartheid agents and comparing himself to Winnie Madikizela-Mandela.
The PIC did not answer specific questions either but noted: "Ayo Technology Solutions is a listed entity and the PIC wishes not to make comments or put into the public domain information that may affect the stock. It is, however, sufficient to point out that the investment in Ayo Technology Solutions, as with all the investments, followed the necessary internal investment approval processes."
The value to Survé from the PIC investment does not take into account the unrealistic valuation of R43 per share that the stock trades at — or not, seeing as it hardly trades at all. The listing price was set by the R43 per share paid by the PIC, but other investors are not biting at all at that price.
We put it to PIC and Survé that this demonstrated how unrealistic the valuation of R43 per share was. They did not respond.
This makes it hard for the Survé family to sell shares to realise the benefit of the PIC’s cash injection, but the main reason for the private placement was for Ayo to acquire the 30% stake in the South African arm of British Telecommunications for about R1bn. But that was already owned by another Survé family-controlled company, AEEI. In effect, R1bn in GEPF cash was used to transfer an asset from one company controlled by the Survé family, AEEI, to another, Ayo.
We asked the PIC to explain what value the GEPF would derive from this deal, given that AEEI itself was listed and the PIC could have accessed these same assets on a significantly cheaper basis via an investment directly in AEEI. This was because AEEI, which owned the 30% of BT and 80% of Ayo, was already trading on the JSE at a much lower price than R43 per share.
In December 2017, shortly before the PIC made its decision, AEEI was trading at R5.30 per share. The PIC did not respond.
We put it to Survé: "We are given to understand that much or all of this R1bn windfall for AEEI shareholders is likely to be distributed in the form of dividends to AEEI shareholders, of which the Survé family trust, via Sekunjalo Investment Holdings, holds a 61% majority. Please comment." He did not respond.
The rest of the GEPF cash, a war chest of about R3bn, is to be used to build the relationship with the British multinational, to buy up other companies and to leverage Ayo’s BEE credentials to gain a bigger slice of the South African technology market.
Information emerging from the PIC is not reassuring. The investment proposal for Ayo was tabled at the last moment: on December 20, the day before the due listing date, creating a risk of undue pressure on the investment committee, although the listing eventually took place on January 8.
Documents from the investment committee meeting, seen by amaBhungane, disclose several concerns about the Ayo deal. The comprehensive due-diligence approval process was waived. Assessment team members were concerned that a number of Ayo’s board members were closely linked to AEEI and were not truly independent, possibly leading to a conflict of interest.
Nevertheless, the investment was approved.
Further, the committee clearly had some concern about the validity of the R43 price per share, because it placed another condition, namely that the PIC and Ayo enter into a put option to protect PIC’s clients against a share price decline.
We asked the PIC if these conditions were met. It did not respond.
Some of the concerns around Ayo were already known to amaBhungane when the prelisting statement for Sagarmatha was issued at the end of March.
Sagarmatha, the "African unicorn" that was to house Survé’s media and online shopping interests, seemed to be following the same script, with a private placement being touted at R39.62 per share, for a company with a negative NAV.
Despite the presence of several prominent named investors who were advertised as being committed to invest at that price, the suspicion was that PIC money would again really sweeten the deal. That fear proved well founded.
It has been confirmed that the same pressured timetable was followed, and the PIC investment committee met on April 11 to decide whether to fund Sagarmatha – just two days before the revised listing date of April 13.
The bid failed, to Survé’s evident fury, but once again there are questions about the procedures followed by the PIC.
Sources with knowledge of the 11th-hour meeting said that one of the loudest voices lobbying for the PIC to buy an undisclosed stake in Sagarmatha was PIC CEO Dan Matjila. He allegedly delivered letters of support from trade unions that stood to benefit from the investment.
Sources with knowledge of the PIC’s meeting allege that Matjila offered to arrange a meeting between the investment committee and Sagarmatha executives in a bid to change their mind.
One source described Matjila’s attempts to push through the deal as "suicidal" in that it raised serious questions about his independence and his ability to act in the best interests of the PIC and its clients.
PIC head of corporate affairs Deon Botha told amaBhungane: "The PIC was requested to participate in the private placement of shares in anticipation of the public listing of Sagarmatha Technologies…. Following the deliberations by the investment committee, it was decided that the PIC will not participate or invest in Sagarmatha’s private placement," Botha said.
In response to follow-up questions about Ayo, Botha said: "It is clear from the list of your questions that you are insinuating wrongdoing on the side of the PIC and that … Matjila is behind these transactions. This is unfortunate. The PIC processes are such that no one individual takes investment decisions. All investments are taken by specific investment committees in line with the approved delegation of authority and due diligence is a key component of the investment process. Investment in Ayo is no different."
Although Sagarmatha was informed of the JSE’s decision on April 10, it waited 24 hours — until after the PIC rejected the investment — before making the announcement to the market.
Additional reporting by Susan Comrie