Picture: ISTOCK
Picture: ISTOCK

It’s beginning to look like a deal that was too clever by half.

If the arrangement had gone according to plan, the architects behind the proposal of African Phoenix Investments (API) to buy back its 13.5-million preference shares at a hefty discount to face value would have scored considerable kudos — and, no doubt, substantial fees.

It’s the sort of terribly smartly structured transaction that helps to make reputations and fortunes, when it works. And it might yet end up achieving much of the planned outcome.

But right now it just looks too clever, and rather abusive. And you have to wonder how the JSE gave its stamp of approval to a transaction that is so tentative in what it is asking of shareholders as to be utterly dismissive of minority rights.

Essentially, API wanted shareholders to approve a transaction it may, or may not, carry out through a process it had not decided upon until it was forced to do so in court papers last week. It’s difficult not to believe that the uncertainty of the offer put to shareholders was part of the plan, as it would complicate — and therefore make more daunting — any challenges by minorities, who were likely to be more confused than enraged.

API’s plan was to pay R506m for the 13.5-million preference shares that were the source of R1.13bn of capital in the company’s balance sheet and that had been issued by African Bank in the 10 or so years leading up to its spectacular collapse in 2014.

The deal, as planned, would have resulted in R610m of wealth being transferred from the preference shareholders to ordinary shareholders. It was part of a plan to establish a black private equity fund and had the backing of the Public Investment Corp (PIC), which holds 15% of API.

 

This would be a much more encouraging development were it not for the lack of clarity about who has to carry the legal costs attached to such action.

When it confirmed, for the purposes of the court, that it would be implementing the buyback by way of a scheme of arrangement, API stated that any party opposing the court application for approval of the scheme would pay the costs of the application.

Many of the 29% of preference shareholders who did not attend last month’s meeting to vote on the proposal were unaware of API’s plans.

With years of no dividend payments they had assumed their only returns would be on the eventual repurchase, which in the case of preference shares has always been at face value.

The R37.50 market price reflected the nonpayment of dividends and, with management confirming there would be no dividend payments in the years ahead, there was no prospect of an improvement in the market price.

The court action gives these long- suffering, silent preference shareholders an opportunity to have a say, though the uncertainty around legal costs might discourage them.

It’s important to point out that 76.75% of the preference shareholders attending last month’s meeting did actually vote in support of the buyback. A large chunk of that vote came from preference shareholders who also held ordinary shares and so stood to be net beneficiaries.

By confirming it is going the scheme route, API has rendered redundant the application Cilliers made to the court on the very same day. Cilliers wanted the court to confirm his appraisal rights in the event API abandoned the scheme and opted for the voluntary buyback.

Cilliers says he was determined to ensure his rights were protected, whichever option API pursued, and was prepared to incur the inevitably hefty legal expenses involved.

Though no longer pertinent, Cilliers’ court papers provide a chilling perspective of the transaction and highlight a number of concerns about the mechanics of the process.

At the very least the JSE needs to explain why it allowed investors who appear to be related parties to vote on the deal.

And much as there is a profound need for private equity firms that are black owned and controlled, the PIC should not show itself so willing to promote this at any cost.