African Phoenix Investments inflames investors
Preference shareholders are worried about the plan to buy back their shares at a huge discounts
Almost five years after African Bank Investments Ltd (Abil) stunned JSE investors with the suspension of its shares and the curatorship of its underlying banking business, its progeny, African Phoenix Investments (API), led by an entirely new executive team, looks set to stir things up again.
API’s JSE-backed plan to buy back all 13.5-million of its preference shares at a huge discount to face value could set a precedent that will send a chill through preference shareholders across the JSE.
The API executives are planning to buy back and cancel all of the 13.5-million preference shares issued by Abil in the 10 or so years before its spectacular implosion. But they don’t want to pay the R100 face value; instead, the company has offered R37.50, which it says is in line with what the preference shares have been trading at. The preference shareholders say the trading level is the result of the company’s failure to pay any dividends for the past few years as well as the board’s statement that it will not be paying dividends for the next several years because it wants to use its capital for investments in a private equity-type fund.
"By not paying dividends the board has ensured that the market price is significantly below face value, and now they want to expropriate us at that low price," says Albie Cilliers of Cilandia Capital, adding that the proposal is nothing more than a bid to transfer R600m from preference shareholders to ordinary shareholders. The furious preference shareholders made their feelings clear during a riveting teleconference with API executives last month.
The teleconference, a recording of which has just been uploaded to the API website, provided little in the way of substantial response to the questions raised by the preference shareholders other than the frequent reminder that lawyers had cleared the deal and the board had ensured there were no conflicts of interest.
It also included some choice comments on the credibility and rigour of the "fair and reasonable" opinion provided by independent expert EY, which backed the proposal. Preference shareholder Nick Krige said he had serious doubts about its credibility and was deeply sceptical of the expert.
He also said talk of unlocking value for the ordinary shareholders through private equity-type investments was a "pipe dream".
A second teleconference participant noted that African Rainbow Capital, which has substantially greater firepower at its disposal, was trading at a hefty discount to its NAV.
The preference shareholders say the proposal is an oppression of their rights and involves an egregious conflict of interest.
Preference shareholders who are not also ordinary shareholders (a large chunk of preference shareholders also hold ordinary shares and so stand to be net beneficiaries) are incensed that the JSE allowed the ordinary shareholders to vote with the preference shareholders on the resolution at the AGM this week.
"Even if all the preference shareholders vote against the scheme, their voting power only equals 0.38% of the total voting at the meeting," says Cilliers.
In May 2016 Abil emerged from business rescue with the same shareholder base it had when it entered — 1.5-billion ordinary shares and 13.5-million preference shares. Critically, the newly named African Phoenix was no longer a bank holding company.
It still owned Stangen (an insurance subsidiary) and soon had R1.59bn cash at its disposal from dividends declared by Stangen, of which R462m was attributable to ordinary shareholder equity and R1.13bn to preference shareholders. If successfully implemented, the buyback would cost R506m, with the remaining R610m of preference shareholder value going to the ordinary shareholders.
The new executive team, which wants to use its cash to invest in a private equity-type fund called API Capital Fund, says the preference shares are a legacy of the old Abil structure. While it was a suitable part of the traditional funding for a bank, it is not suitable for API’s plans. It wants to clean up the structure to remove any potential conflicts between preference shareholders and ordinary shareholders.
This week API CEO Siya Nhlumayo assured the FM that if at least 75% of the preference shareholders did not back the scheme, "the board will exercise its discretion not to proceed with the scheme repurchase". API will then repurchase the preference shares on a voluntary basis.
Cilliers is not persuaded and says he is dismayed that the JSE has allowed API to use its discretion to decide whether or not to let the ordinary shareholders determine the outcome of a vote that will benefit them. He is unhappy about the voluntary repurchase, which he says is oppressive in the context of the refusal to pay dividends. Tensions between the parties escalated when Cilliers was told he would not have appraisal rights even if more than 5% of the preference shares were repurchased on a voluntary basis.
API’s aggressive move is almost without precedent. Cilliers fears if it gets away with it, lots of other companies may want to try something similar.
Last year a similar proposal by UK insurance group Aviva was abandoned after a backlash from investors and MPs that damaged the group’s reputation.