Behind Brait’s fall from grace
Do this Brait director’s share purchases count as insider trading? The company says not
Brait nonexecutive director Christopher Seabrooke has, through a trust, been busily buying shares in the investment holding company despite having knowledge of a commercially confidential transaction.
But Brait has denied any suggestion of insider trading.
Sabvest Finance & Guarantee Corp — controlled by a trust of which Seabrooke is a trustee and beneficiary — has bought Brait shares worth more than R107m since the beginning of the year.
The thing is, Seabrooke has known since August 2017 that Brait, which owns Virgin Active and Premier Foods, had set up a special purpose vehicle (SPV) to invest in public market securities.
Seabrooke also knows exactly what these securities are, even though shareholders were told last week — when the SPV, 10 months after its establishment, was revealed for the first time in Brait’s financial results — that "the listed position remains confidential".
Brait’s 35% shareholder, Christo Wiese, through his investment company, Titan, has since pulled out of the SPV. Not that it matters, as shareholders only found out about the related-party deal in which Wiese was involved at the same time that they found out that he was no longer involved.
It would not be the first time that the company has sailed close to the wind. In 2015, the then Financial Services Board probed trading in the shares of Brait and Steinhoff ahead of a deal with Pepkor, given that Wiese was a material shareholder in both Brait and Pepkor at the time. No wrongdoing was found.
Still, given the company’s history, it is certainly not erring on the side of caution. "Chris [Seabrooke] specifically considered whether he had any material nonpublic price-sensitive information and believes he does not," a Brait representative told the FM in e-mailed responses.
"While he does know the name of the issuer of the undisclosed listed securities, the value of that holding is [less than 3%] of Brait’s gross assets of R39bn. The choice by Brait not to disclose the identity yet relates to trading in those securities only and not to a sensitivity to Brait’s share price at all."
At the same time, Brait says, shareholders will be "happy" when it is disclosed in due course that the "investment is not in any way connected to Steinhoff, Steinhoff Africa Retail or any Titan-related entities, and that it is a sound strategic investment, in line with Brait’s investment philosophy".
The value of the investment is not "material to Brait’s portfolio net asset value", the representa- tive says.
Brait says it is purposely using an SPV to hide that it is building a position in a listed security, so as not to move the price higher. "Revealing the identity of the security would inhibit Brait’s ability to conclude a transaction on the most favourable terms for Brait and hence Brait’s shareholders."
Such stealth tactics are not unusual. Many an acquisitive buyer has used SPVs or even contracts-for-difference (CFDs) to build up a position in a company without showing up on shareholder registers and breaching the all-important 5% ownership level, which in turn triggers a mandatory announcement on the part of a company.
Recently, RECM & Calibre used a combination of CFDs and an SPV called Livingstone Invest-ments to covertly accumulate a 28% stake in Astoria before the company’s shareholders knew what had hit them.
One analyst, who declined to be named, says that given Brait’s preference for unlisted investments, it could be using the SPV to buy back New Look bonds.
The UK fashion retailer’s debt is trading at a 30%-50% discount to face value, showing just how poorly debt investors view the prospects of a company for which Brait paid R14.9bn and now values at zero.
Brait could buy back a notional £1.2bn worth of New Look debt for just £600m (the current market value), saving on interest costs, the analyst says. It could then refinance this debt on more favourable terms or even convert some of the bondholders to equity holders.
Doing this on the sly through the SPV would keep bond prices subdued. If the prediction turns out to be true, the stock will rally, the analyst says.
Considering that Brait had cash on its balance sheet of just €199m (R3.2bn) at the end of March, it is little wonder that it has taken on R1.4bn in debt to fund the SPV. The "undisclosed securities" posted a notional loss of R166m to March.
Meanwhile, the JSE’s Shaun Davies says he will discuss Seabrooke’s trades with his market surveillance team. Trading activity is generally reviewed only once a company has made information public and it is deemed to have been price sensitive, he says.