Fast buck as African Phoenix soars

Value Capital Partners (VCP) has walked away with a nice little profit on its comparatively short-lived investment in African Phoenix Investments (API) after selling it to listed financial investment company Zarclear for 80c a share.

Sam Sithole, CEO of the shareholder activist group, won’t give details, but analysts say VCP bought API, previously known as African Bank Ltd, at about 50c a share about two years ago.

API’s origins date back to May 2016 when African Bank Investments Ltd (Abil) emerged from business rescue. The renamed entity, which was no longer a bank, had R1.59bn cash at its disposal, of which R462m was attributable to ordinary shareholders and the remaining R1.13bn to the holders of 13.5-million preference shares. In addition it had insurance company Stangen, which is in the final stages of being sold, and a multibillion-rand assessed tax loss.

VCP sold its approximately 16% of API, with the remainder coming from longer-term investors Allan Gray and Coronation. So Zarclear, which focuses on financial markets, now has 22% of API, which holds cash of about R1.2bn and an assessed tax loss of about R14bn, based on Abil’s accounting loss..

API CEO Siya Nhlumayo tells the FM he cannot confirm the size of the tax losses at this stage. "Ellerines and Residual Debt Services [former Abil-related entities] are still in the Phoenix portfolio and so capital losses have not yet been assessed," says Nhlumayo.

Zarclear CEO Warren Chapman did not respond to requests for comment, and the formal Sens statement reveals little of his intentions for the R246m investment. "Zarclear will be formally engaging with the company and its other major shareholders to explore and pursue value-unlocking initiatives for the mutual benefit of both the company and Zarclear and their respective shareholders," says the statement.

Whether this "value unlock" will include continued support for API’s recently established black-managed investment company will become clear in the months ahead. The Public Investment Corp, one of API’s largest shareholders, is keen on the project but Nhlumayo says no purchases have been made yet.

One analyst, who did not want to be named, says it makes sense to merge API with a profitable financial business that can make most use of the tax loss.

The profit picked up by VCP is thanks almost entirely to the unprecedented discount that was paid to repurchase 13.5-million API preference shares earlier this year.

Of those, about 1.25-million are the subject of a court battle with a few disgruntled preference shareholders, including activist Albie Cilliers.

Cilliers launched his appraisal rights shortly after the shareholder meeting in March gave the necessary approval for the buyback, and now he wants the court to ensure he is given "fair value" for his preference shares.

He won’t say exactly how much that is, only that it is considerably more than the R37.50 each offered by the company, which is a hefty discount on the R100 at which they were initially issued several years ago.

Cilliers says he was surprised by the recent sale to Zarclear, but adds: "It doesn’t matter to me who the owners are. I’m not fighting the board, I’m fighting the facts." The facts, as Cilliers sees them, are that his preference shares are worth considerably more than R37.50 each. He’s digging in for a long legal battle. API has opposed Cilliers’ request for documents he wants to support his fair value claim and must now file answering papers to explain why the documents should not be handed over.

The repurchase was part of a restructuring plan designed to clean up API’s capital structure and use it more efficiently to build the primarily black-managed investment holding company. At R37.50 a preference share, the total cost of the repurchase was just R506m, allowing the ordinary shareholders to assume ownership of the remaining R610m of preference shareholder value.

Back then, API said it wanted to "build a portfolio of eight to 10 BEE companies of medium size with high growth potential that could deliver a return of 25% per year".

API’s plans have been slammed by some, like preference shareholder Nick Krige, as "a pipe dream," especially as companies like African Rainbow Capital, with their substantially greater firepower, are trading at hefty discounts to their NAV.