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Resilient and Fortress start to unwind

The property group plans to dispose its Fortress shares – the start of the process to eliminate the complex web of cross-holdings with sister companies.

Property company Resilient plans to unbundle shares in its sister company Fortress amid a furore in the investment community about the complex web of cross-shareholdings between the two companies.

But the move has raised more questions than it allays. 

Minutes before market close on Friday, Resilient told investors that it has started a process to restructure its shareholding in Fortress by dumping a significant portion of its 16% stake in Fortress B shares.

Resilient will offer 15.65% of its Fortress B shares – worth about R2.5 billion – to existing Resilient shareholders in a ratio of 0.4 Fortress B shares for every Resilient share. Meanwhile, Resilient’s remaining shareholding in Fortress B shares of about 1% may be retained or sold.

To recap on the cross-shareholdings in the Resilient group of companies: Resilient owns about 16% of Fortress B, which in turn owns about 9% of Resilient. Resilient also holds stakes in Greenbay Properties (about 23%) and Nepi Rockcastle (about 12%).

The Resilient companies have been accused by asset manager 36ONE, stockbroker Navigare and independent sell-side research house Arqaam Capital of using their intertwined shareholding structures, black economic empowerment (BEE) partners and questionable accounting policies to artificially boost earnings, their own net asset values and dividend payments.

Read more: What is the Resilient stable accused of?

Resilient has denied all allegations of wrongdoing.

Garreth Elston, an analyst at Golden Section Capital, questioned why Resilient announced a major announcement before market close and not by arranging a call with investors and analysts at a time when there is nervousness around the property group.

Fears that the Resilient group of companies might be the next Steinhoff has seen more than R40 billion wiped off the value of the four companies since January.

Elston welcomed Resilient’s decision to dispose of the Fortress shares, as in the long term it “should result in a clearer and clean company to analyse”.

He questioned why Resilient didn’t opt for a share-swap arrangement in terms of disposing Fortress shares as the current option sought by the company might have a tax burden for existing investors.

And for existing Resilient shareholders, Elston said the Fortress share disposal will largely be neutral. “From a shareholders’ point of view, they will roughly be in the same position they were because of the disposal of shares.”

However, Elston questioned whether Fortress will also undertake the same exercise of disposing its Resilient shares, as there was not a great deal of information in Friday’s announcement about this.

“The assumption is that Fortress might do the same with their Resilient shares. Another question is whether Resilient will keep its shares in Greenbay and Nepi Rockcastle,” he said.

Apart from generating rental income from its property portfolio of shopping malls, Resilient receives dividend payments from its three sister companies, which are classified as equity investments. Fortress and other potential share disposals mean that Resilient is going to give up an income stream as its shareholdings guarantee it dividend payments from the companies.

Eliminating the cross-shareholdings in other sister companies might reduce Resilient’s net asset value and impact future dividend payouts, said one analyst who didn’t want to be named.

“As a progressive dividend payer, Resilient’s disposal of its shares in related companies might even see it downgrade future dividend payments.”

Many investors expected Resilient to announce the findings of its much-anticipated board-instituted independent review into allegations of share price manipulation by key directors on Friday instead of the Fortress share disposal.

The review will also look at whether all Resilient’s cross-shareholdings should be unwound and the merits of reconsidering its relationship with BEE partners, the Siyakha Education Trust.

Read more: Resilient’s own probe in the spotlight

In anticipation of the review’s release, the share price of all Resilient companies had one of the best days this year as they each rose between 5% and 14%.

Resilient and Fortress share graph

Resilient didn’t release the findings as its board and leader of the review Shauket Fakie are yet to interview an unnamed director of 36ONE Asset Management on the contents of its scathing report into the property group.

Resilient will update investors on the expected release of the report on Tuesday.

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Are they starting to unwind or are they starting to unravel?

This group of intertwined companies created for themselves a nice positive feedback loop to prop up the valuations. Once you cut the cables of this merry-go-round there is no telling where the asset value will end up. Almost like Steinhoff where people are still hiding because the debris is still flying.

As a rather big S.A. listed company Resilient should realise there is no hiding places. Unscrupulous corporate tricks won’t fly. The board’s continuous lack of urgency and unwillingness to communicate clearly, timeously and comprehensively are paramount to derelict of duty and accountability. If the company is serious to address it’s questionable gross equity interests in other property Reits, it must be done with all three such related parties. It should do this promptly, efficiently and urgently. If capital can not be employed sensibly, it should be returned to shareholders. If Des De Beer or the board are not up to job, they should resign. Resilient is willfully destroying shareholder value and that is criminal.

End of comments.

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