African Phoenix: Activist wants his share
API’s forced repurchase scheme has become a lot more complicated than its architects could have expected
African Phoenix Investments (API) has got itself into a spot of bother.
Its plan to buy out preference shareholders at a huge discount to face value has bumped up against one of those creatures rarely seen in SA — a shareholder activist.
API’s opportunistic plan to pay R506m for R1.13bn of preference shares relied on SA investors behaving in that traditionally sheep-like manner that makes them such easy prey for "innovative" investment bankers like the team behind API.
API, which arose out of the ashes of African Bank Investments Ltd (Abil), is hoping to buy back and cancel all 13.5-million of the preference shares issued by Abil in the 10 or so years leading up to its collapse in 2014.
But it doesn’t want to follow the age-old tradition that has underpinned a vibrant preference share market and pay face value for the preference shares. Instead it says it will pay the long-term market price, which is R37.50.
This would be reasonable enough if dealing with an ordinary share, but much of a preference share’s market value is determined by the accompanying dividend. And this cash-rich company has refused to pay dividends in the past few years and says it will not be paying dividends for the next several.
It wants to use its cash to invest in a private equity-type fund.
Hence the low market price.
It looks like a deal you’d have to refuse.
But judging by the voting results at the recent shareholder meeting, API came remarkably close to walking off with the R610m prize.
And it may yet pull this off.
However, the whole thing has become a lot more complicated than the deal’s architects could have expected.
Twenty-nine percent of the preference shareholders didn’t even bother to attend the meeting, which is remarkable given that each of the 13.5-million preference shares has a face value of R100. Of those who did attend only 23% voted against a proposal that would have forced them to hand over each of their preference shares for just R37.50.
Part of this turkey-voting-for-Christmas attitude can be explained by the fact that a chunk of preference shareholders also hold ordinary shares.
But there’s still a large proportion who seem to have done nothing to try to stop the deal.
It’s possible many of these are small private investors who bought the preference shares back in the African Bank days and long ago abandoned hope of getting anything back.
But unfortunately for API, one of the pref holders is Albie Cilliers, who has a formidable track record of pushing back against attempts to usurp his rights.
Cilliers has triggered a previously unused section of the Companies Act.
He has sent a notice to API requiring it to seek court approval to implement the forced repurchase scheme behind special resolution 1, which received the backing of 76.75% of pref holders attending the meeting. Under the old companies act a scheme of arrangement automatically required the approval of the court, but in terms of the new act court approval is only required if more than 15% of shareholders and pref shareholders voted against the scheme and if one of those holders required the company to seek court approval.
Getting court approval for the deal is not a certainty, and is likely to be a lengthy process, given Cilliers’s determination not to be parted from his prefs at the knock-down price being offered.
Owing to the unprecedented nature of the buyback, Cilliers might be able to persuade a court that it is not a fair deal.
If API believes its chances are slim, or if it cannot persuade Cilliers to withdraw the court application, it can declare its special resolution 1 a nullity and pursue a voluntary buyback in terms of special resolution 2, which was approved at the same meeting.
But that has its own challenges, chief of which is the uncertainty of the outcome, which would not suit API’s private equity plans.
And, though API contends Cilliers would not have appraisal rights if the voluntary buyback were implemented, Cilliers begs to differ.