JOHANNESBURG – Investors in embattled JSE-listed Pinnacle Holdings perhaps have a right to feel a bit short-changed as the company and senior executives seem to have collaborated in buying shares on the open market with information that was not available to external shareholders.
Pinnacle announced on Monday that it had acquired 2 112 000 ordinary shares in the company for a purchase consideration of R29 046 610. The fact that when Pinnacle reported interim financial results to the end of December 2013, it only had cash equivalents of R23m in the bank, makes the story more intriguing.
The highest and lowest prices paid by Pinnacle for the ordinary shares were R14.55 cents and R12.98 per share respectively.
According to the announcement made on the Stock Exchange News Service (Sens), the company was granted permission in terms of a special resolution passed by the members at Pinnacle’s Annual General Meeting (“AGM”) held on October 25 2013.
Moneyweb met with Pinnacle management on Wednesday and they made the point that the disclosure on Sens is voluntary. In terms of the JSE listing requirements, the company only has to inform the market if it exceeds 3% of the issued share capital.
Henry Ferreira, Group CEO Distribution and company spokesperson emphasised that the company was working hard to improve communication with stakeholders and wanted to make the disclosure before the company entered into a closed period on July 1 2014.
This is all good and well but investors might want to remember some of the more recent history, and while it may play to the letter of the law, minority shareholders might feel aggrieved that they did not have this information on hand.
On March 25 2014, Pinnacle advised shareholders via Sens that Takalani Tshivhase, an executive director of Pinnacle, has been charged with alleged attempted bribery of a Lieutenant General of the South African Police Service, to the value of R5 million.
At the time shareholders were already grumbling that Tshivhase, CEO Arnold Fourie, and finance director George Wiehahn had been selling shares before the news hit the market.
Fourie had sold R23 million worth of shares at R19.17, following the expiry of a zero cost collar he had established in December 2012.
Wiehahn had sold off R1.6 million of exposure in contracts for difference (CFDs) at R20.20.
Tshivhase sold R4 million of shares at a weighted average price of R20.06.
After the bribery charges hit the market, the shares fell from R20 per share to a low of R11.45.
The timing appeared to work out perfectly for these directors.
Shortly thereafter Fourie and Shawn Marx – director at Pinnacle Africa Holdings – actively went into the market and began buying shares at under R15. This they did inform the market about.
At this point, Moneyweb asked Pinnacle two questions. Firstly, the R29 million seems to be a big chunk of the cash resources of the business and secondly, was it a good use of shareholder funds to buy shares in the open market?
To the first point, Ferreira points out that the JSE, the company sponsor and the groups financiers had to approve the buy-back and they needed to conduct a solvency and liquidity test on the company to ensure there was sufficient working capital for the next 12 months. This, Ferreira says, passed all the checks and balances set in place by the board and the regulators.
To the second point, Ferreira says that Fourie motivated to the board that the company was trading at a very attractive price to earnings multiple and the buy-back transaction made sense, rather than looking at an acquisition.
Fourie is acknowledged as a well-respected entrepreneur in South Africa and he clearly holds significant sway with the board in a crisis situation to drive the deployment of the cash resources within the group.
According to the Sens announcement, the buy-back happened between April 14 and May 2 2014.
Again, the timing of the share purchases may be viewed as questionable considering that a share buyback often drives up a share price as the company becomes an active buyer in the market.
Now considering that the buy-back is not immediately earnings enhancing (0.58%) and negatively impacts the Tangible Net Asset Value per share to the tune of 9.7c (-1.45%), one has to wonder about the decision making process. Did the directors buy with the knowledge that the company was going to be coming into the market shortly or did they buy with the knowledge that it would announce a buy-back nearly 2 months after the process was completed?
Either way the timing appears to be fortuitous.
While it is fair to acknowledge that cash resources fluctuate in business and we recognise that many of the employees and management within Pinnacle have also been burnt, it appears to be a big call from Fourie and the Pinnacle board to use the majority of their cash pile buying scrip in the open market, when there is a fair amount of uncertainty around.