Iqbal Survé’s Sekunjalo Investment Holdings wanted the Public Investment Corporation (PIC) to swop the close to R1 billion debt and equity claims in its print media subsidiary Independent Media for a stake in a company that didn’t exist and at a share price that would be determined by them.
The offer from Sekunjalo was discussed by the unlisted investment team of the PIC in October 2017 after Independent had not been unable to meet its loan repayments “due to a tough operating environment”.
The PIC helped Sekunjalo to purchase Independent by issuing it with a loan of R1.3 billion, which included equity of 25% in the newspaper company. Independent immediately paid the PIC R397 million, leaving it with total exposure of R888 million.
The PIC commission of inquiry looking at issues of impropriety at the institution and lapses in its investment processes took a turn in testy waters with a focus on the transactions the PIC has concluded with companies under the Sekunjalo banner that have been in the spotlight over the years.
The PIC manages over R2 trillion in assets largely belonging to the Government Employees Pension Fund (GEPF) and other state entities.
To invest or not to invest?
At the time the investment in Independent was considered, neither the PIC board nor the GEPF supported the transaction.
Former PIC CEO Dan Matjila told commissioners the GEPF was concerned that Independent was in a sector with a “bleak future” and the PIC board asked the PIC to invest at a lower price and find another investor to share the risk.
“The asset has performed poorly in terms of financial returns,” said Matjila, likening it to other print media companies.
Asked by commission assistant Gill Marcus why the PIC would decide to invest in the company given the apprehension of the board and the GEPF, Matjila was careful to outline that the transaction was sent to committees and finally approved by the board.
He said the PIC made the investment based on the value proposition placed before them at the time – Independent had a comprehensive digital strategy to mitigate the dwindling market share that print media was grappling with.
“The board agreed with that [and] despite reservations they approved it on that basis,” Matjila said.
He added that the nature of investments was a “guessing game” and the coin can fall on either side.
Debt and share swop arrangement
Matjila said Sekunjalo approached the PIC as early as September 2017 to try and restructure the loans and claims that were due and payable to the PIC after it had struggled to meet payments.
In its initial proposal considered in October 2017 Sekunjalo wanted to “acquire all the shares and loan claims that the PIC has in Sekunjalo in exchange for shares in a new company to be listed named [Sagarmatha Technologies]”.
This is how the PIC would exit from Independent.
In its offer Sekunjalo was willing to double the amount the PIC had paid for direct equity in Independent, while on the loans it would pay back amounts that were slightly higher than those payable, amounting to R1.55 billion.
These ‘higher amounts’ would be converted into shares – at a listing price that was yet to be published – when Sagarmatha issued its pre-listing statement.
In previous testimony, PIC listed equities general manager Lebogang Molebatsi, who was part of the team that worked on the Sagarmatha transaction, outlined how the company had been overvalued. The company wanted to raise R3 billion through its initial public offering, with an asking price of R39.62 per share.
He said the team had priced it at R7.06 but received a lot of pushback from the company.
The PIC put a counter-offer on the table, opting only to convert its equity in Independent to a stake in Sagarmatha but stating that all loans be settled in cash at their amortised value as at October 30, 2017. The listed investment team would also carry out its own assessment to establish its appetite for investing in Sagarmatha.
“The PIC counter-offer allowed for the PIC to fully exit the loans and preference shares with a return of about 13%,” said Matjila.
From Matjila’s statement it is not clear what happened to this counter-offer or whether it was ever considered by Sekunjalo because when the PIC’s unlisted investment team presented the offer to the investment panel, it mentioned that “there will be no cash pay-out but the issuance of shares”. This meeting took place in December 2017.
The panel approved the Sekunjalo offer presented by the team on the condition that the exit was not dependant on Sargamatha’s listing and that the deal received all the requisite board and shareholder approvals.
Matjila said the agreement was signed by him on behalf of the PIC and finalised with Sekunjalo.
“One of the suspensive conditions to the agreement was the successful listing of Sagarmatha, which ultimately never happened,” said Matjila. Thus the agreement lapsed.
What exactly did the PIC agree to?
A copy of a letter sent to Sekunjalo in January 2018 by the PIC’s private equity head Mervin Muller caused confusion between Matjila and evidence leader advocate Isaac Monnahela as they tried to determine the details of the agreement.
What was contested is a clause where Muller states that the offer was “separate from the offer to acquire a stake in Sagarmatha and the PIC’s acceptance to exit the investment in [Independent] and [Sekunjalo]”. Further, it should not be conditional upon the PIC’s participation in the company’s listing.
The letter does not explicitly mention whether the shares would be paid for in cash or through a share swop but says Sekunjalo should give the PIC details on how it intends to fund the offer.