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African Phoenix shares surge on the 1st day of trade

But not everyone is happy.

On Wednesday, February 1, 2017, the whole sorry saga that befell African Bank and its holding company, Abil, almost two-and-a-half years ago comes full circle, when the shares of Abil convert to trading under the new name of African Phoenix Investments. 

Update: The ordinary shares of African Phoenix (previously Abil) had surged to 54 cents in morning trade on the JSE on Wednesday following the resumption of trade under the new name, while the preference shares were changing hands at R36 per share. The ordinary shares have a net asset value of 36 cents according to results for the year ending September 2016, and were suspended in August 2014 at a price of 31 cents per share. 

The preference and ordinary shareholders of Abil at the time the shares were suspended in August 2014 have been converted to ordinary shareholders (JSE share code: AXL) and preference shareholders (JSE share code: AXLP) of African Phoenix at a ratio of 1:1, so there is no dilution.

The company will begin trading on Wednesday with about 1.4 billion ordinary shares in issue and 13.5 million preference shares.

But not everyone is happy

While the number of ordinary and preference shares has stayed the same, a group of preference shareholders argues there should have been a notable change to the definition of the preference shares as a result of changes made to the company’s Memorandum of Incorporation (MIC), which defines they type of business the company undertakes.

When Abil’s preference shares were originally issued, the company was incorporated as a bank controlling company, as one of its subsidiaries owned a banking licence. As a result, the preference shares it issued (in line with the Bank Act which allowed the shares to qualify as Tier 1 capital) were non-cumulative in nature. This means that if the company missed the payment of a dividend due to poor results, the missed dividend(s) would not have to be caught up.

But because African Phoenix is no longer a bank controlling company, the preference shareholders are unhappy the status of the shares have not changed to cumulative, meaning in years where the compay does not declare profits the dividend continues to accumulate until it has been paid in full.

(A note on preference shares: in most cases they pay a dividend based on a percentage of the prime lending rate. In the case of African Phoenix this is 75.9% of prime, based on a face value of R100 per share. This means African Phoenix should pay a combined pre-tax interim and final dividend of R7.97 per share) equivalent to about R108 million per annum.

African Phoenix’s Memorandum of Incorporation (MOI) confirms this – it was changed last year to reflect the company would be a non-bank controlling investment holding company which would make it comparable to the likes of Grindrod, Imperial and Invicta. These companies all have preference shares which are cumulative in nature, not non-cumulative. Only the banks – which include the likes of the big four, Investec, Capitec and Sasfin have non-cumulative preference shares.

African Phoenix indicated they wanted to change the MOI ahead of the company’s AGM in September last year, and began engaging with shareholders. When preference shareholders pointed out that the company would now be a non-bank controlling investment holding company, and should convert the preference shares to being cumulative in nature, it was met with resistance. 

“A group of preference shareholders notified the board of African Phoenix ahead of the AGM last year that they should not go ahead with a vote on changes to the MOI without the approval of preference shareholders,” says Frederic Bouchard, a fund manager with Florin Capital Management who holds the shares on behalf of clients. 

“We asked the board to postpone the vote until we could come to an agreement on the nature of the preference shares.  The board elected to override preference shareholders and took the vote to ordinary shareholders, who approved the changes to the MOI.  The issue here is that Abil preference shareholders subscribed for preference shares in a bank controlling company not in an investment holding company, the two are materially different.  Like ordinary shareholders, preference shareholders should have been awarded the right to vote on the changes to  the MOI. We think that the changes to the MOI were done illegally, and we are considering legal action.”

Financial Director of African Phoenix, John Evans, kindly responded to our questions late on Tuesday night and should be forgiven for his brevity. “Shareholder voting at an AGM is governed by a company’s MOI. The provisions of the MOI did not, in the opinion of the board [of African Phoenix], require a separate preference share vote on the proposed changes.”

He added that: “The preference shares were issued as non-cumulative shares.  There is no basis or authority on which they can be changed into cumulative shares.”

The payment of the preference share dividend is possible

African Phoenix resumes life essentially as a cash shell with R1.8 billion at its disposal. The executive team led by CEO Enos Banda and Financial Director John Evans aim to outline the company’s strategy in due course. The Stangen business, which was very profitable (it sold credit life policies), has been greatly downscaled by the decision to reinsure the risk in its entirety with Guardrisk. This also entails foregoing most of the associated economic benefits flowing from the policies.

This is what probably prompted the company to issue the trading statement on Tuesday saying the EPS and Heps for the six months ending March 2017 would be at least 26.55 cents per share lower (90%) than for the six months ending March 2016.

The two other legacy investments in its portfolio include Ellerines (which is in business rescue), and an interest in Residual Debt Services (RDS) which is still in curatorship (the bad loan book from African Bank).

The company reported a net asset value of 35.7 cents per share at the end of September last year. But while the company has ordinary shareholders equity of R510 million, it’s the preference shareholders that have provided the bulk of the capital: R1.13 billion.

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I am sure that the executive and non-executive directors, Ordinary Shareholders and the JSE understand that the majority of Preference Shares are owned by semi-retired and retired people who rely on the dividend stream due to them.
For a company to hold back a Preference Share Dividend (when it can clearly afford it) whilst using the capital to reward another class of shareholder(Ordinary shares) seems to me a breach of corporate governance.
The sooner the directors tell the market when the Preference Shareholders dividend is due the better.
Right now the Preference Shareholders are changing hands at around R40 – a yield of 20% – surely this is due to lack of information coming from the Group.

and I am still waiting for my retention fund(African Bank) funds to be released !!!!!

I assume a preference share dividend is on its way. South Africa has become renowned for the protection of minority interests as well as the ability to hold board members and executives personally liable for unethical actions. Even well-connected individuals have been held responsible for their actions as was seen in the Aurora saga.

It is clearly unethical to use the captive preference shareholder capital to fund a business without their input, their vote or even compensating them. This is compounded by the fact that many of the holders are private individuals.

There is enough money in the company to resume the payment of preference share dividends – to do anything else would unfairly bias one class of stakeholder over the other.

In a failed business the pref shareholders stand before the ord shareholders for their return of capital. If Phoenix was wound up this would be the case and the R1.13bn would be returned to the prefs and R0.5bn would accrue to ords. Now the business is “ongoing”, but the crucial point is not in the same form. The two assets providing capital (bad book and Stangen) are both non-operational and winding down. This capital should be returned to the funders. It should not be used to fund an NAV venture for the new ambitious execs. If bad book and Stangen were operational I could understand using capital to retain and grown them. It’s crazy that this capital is used to fund completely new ventures that are unrelated to what the original providers of capital intended. This act is immoral for pref shareholders. The new exec should publish a prospectus and raise their own capital for new ventures and not use the pref capital.

The best investment the directors can make is buy back the Prefs

They have permission to buy back 20% of Prefs. and they have cash on Balance Sheet.

20% x 13.5 m preference shares at R34 = R91m

That is a a capital profit of R49 (R83-R34) per share totalling R132m

(R49m x 2.7m shares)

Also no CGT – as they have CGT losses of over R4bn

And to top it all – the company have 20% less Pref Dividends to pay annually – forever

End of comments.





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