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Heated Trencor AGM leaves lots of unanswered questions

Board has driven the company into a cul-de-sac, with the four-year delay in winding up the business destroying shareholder value – CIO.
Minority shareholders are angry, with value destruction described as being ‘of epic proportion’. Image: Shutterstock

This article has been updated to clarify the position of the trustees and the protectors of the trust as well as All Weather capital’s stake in Trencor.

Trencor minority shareholders were left fuming on Thursday after an annual general meeting at which the board held resolutely to its controversial decision to delay the final winding up of the company until December 2024.

During a heated two-hour long virtual AGM, board chair David Nurek argued they had no choice because of the indemnities they had provided, which expire at the end of 2024.

“If we hadn’t provided the indemnities none of the ‘simplification’ would have been possible,” said Nurek, referring to the planned winding up of the company.

Decades-old structure

He explained that the trustees of a trust structure – put in place in Lichtenstein decades ago while Trencor was being built into a formidable player in the global leasing industry – insisted on this level of protection. The $62 million (R1 billion) indemnity represents a substantial portion of the group’s value and is currently sitting in a no-interest-bearing dollar account.

Shane Watkins, chief investment officer at All Weather Capital – which holds 9% of Trencor on behalf of its clients – criticised the board for not providing details of possible claims that lay behind the need for such substantial indemnities.

Nurek would only say that the amount was agreed after tough negotiations with the trustees, whose identities are not known to the shareholders. The protectors of the trust are Trencor directors. He also said the provision of an indemnity was customary and that Trencor had used law firm ENS to provide advice on the matter.

Shareholder Nic Krige told the meeting he was shocked at the size of the indemnity and, based on his research, that it was far from customary.

“What is extremely unusual is that the cash-back element is so high,” said Krige. He asked the board what Lichtenstein-based advisor they had used and said the indemnity arrangement, including costs involved in delaying the winding up of the business, would cost Trencor shareholders R500 million by December 2024.

More big numbers …

In addition to the $62 million earning no interest, there is a further indemnity of $16 million as well as $10 million being held back for “unforeseen future events and expenses”. Furthermore, management has retained R176 million to cover operating expenses between now and December 2024.

Watkins has said the net asset value of the company is R12.25 a share, most of which is in US dollars, with the exception of three million Textainer shares (worth 258c per Trencor share), which will be unbundled to Trencor shareholders within weeks.

At Thursday’s meeting Watkins said the out-of-touch board had driven the company into a cul-de-sac with the four-year delay destroying shareholder value.

He described the value destruction as being of epic proportion.

Trencor CEO Hennie van der Merwe said that although the cash was not earning any interest it represented an attractive rand hedge for shareholders.

Watkins told Moneyweb after the AGM the Trencor board has indicated that the possibility of a claim is highly remote.

“So what is it they’re not telling us?”

The all-white male board also came under attack for its lack of diversity.

Before he was muted from the meeting Krige described the board as “like walking into an apartheid museum”.

Gomolemo Seete, an ESG analyst at All Weather Capital, asked what efforts had been made to attract new talent to the board since it had identified the need for diversity back in 2016.

Nurek said no search for new talent had been instituted “because we didn’t see the need to” as no new directors had been needed since 2016.

Over 30% of shareholders voted against Nurek’s re-election at the meeting.

 

Trencor share price over the past five years

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Just what is going on here? Lichtenstein trusts with a billion plus rand holding shareholders cash for indemnities? For what? Its time to disclose the truth here! And what exactly does the elderly CEO do all day to justify his income? As for the board…well they are relics of a previous era. One struggles to accept that this used to be a top company in South Africa.

Most distressing though is that it has taken the small shareholders to raise these issues while Coronation and other large shareholders do what they do daily-nothing(except create negative alpha at colossal costs)!

The company does (and SA regulators do) seem to be quite blase and comfortable about the Lichtenstein trust structure as if it is a normal, transparent, easily-understood thing that is in no way questionable.

“…the trustees, who are Trencor directors…” Is this statement correct?

On the face of it there is nothing customary or normal about this arrangement and a forensic investigation into this arrangement is required. There is no public company on the planet with an arrangement such as this. What liability is being indemnified? How on earth can a public company not specify the key risk against its only material asset – if the liability crystalises then Trencor loses the cash – investors must be able to understand the risks.

Given the cash is held in dollars, one can summise that that the potential liability is in USD. To me this suggests a potential exposure to the IRS. Given Trencor’s history of aggressive tax schemes I would not be surprised if there is a potential US tax exposure.

What bank is the cash held at? Is the bank account in the name of Trencor Ltd? Does any party have any form of security over the account? What is its credit rating? Why is the cash not earning interest? How do the auditors confirm the balance?

Yes why is there a divergence of interests between the directors (trustees?) and shareholders. What risk are the trustees (directors) concerned about specifically that they feel that they are on the hook for and require shareholders to indemnify them for?

Can this article be updated to reflect the activist shareholding of all weather and Messrs Krige? On the transformation front..the majority of operational cash flow is form the US Asset and earned offshore.. this was an essential family run business by the Jowells who have externalized their wealth. Mr Watkins is getting a disproportional amount of media coverage for a insignificant shareholding I gather.

All Weather Capital and our clients own almost 9% of Trencor so it is factually wrong to say we have “an insignificant shareholding”.

Let’s get this straight – the trustees demanding the indemnities are also the directors who say the possibility of a claim is ‘highly remote’ ?
Huh ? and there is no alternative to liquidated guarantees ?

Oh, the David Nurek from JCI/Randgold fame!

End of comments.

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