Paper chase

THE PROPOSED TAKEOVER by Bonatla Property Holdings of all the property investments promoted by Sharemax is certainly one of the most amusing proposals yet in South Africa’s financial history. For a start, Bonatla’s current market value is around R45m. The group’s shares are currently trading at about 9c. Earlier this year they were trading at 12c/share. The value of the Sharemax properties and the various loan accounts – that is, the man in the street’s investments in its promotions, such as Zambezi and The Villa – are pencilled in at R4,99bn for the purposes of the transaction.

That’s 100 times more than Bonatla’s current market value. In effect, that means a change in control of Bonatla, as well as its business model. For that, fresh approval from the JSE will be needed. Because, in fact that simply means the joint properties – for which Sharemax is the promoter – will now be listed.

John Burke and his team at the JSE will probably need quite a few days – perhaps weeks, even months – to unravel the proposed takeover. Bonatla isn’t yet advising its existing shareholders what the implications of the reverse takeover will be.

For investors in the existing Sharemax promotions, these transactions seem at first glance like very bad news. So far, Sharemax and its advisers offering the products to the public are still boasting they have never missed an interest payment. We have no evidence to the contrary. However, in the very unlikely event the JSE indeed approves such a reverse takeover, one of the future requirements will be very correct and transparent financial reporting by one of the JSE’s accredited auditors. ACT Audit Solutions, currently the auditors of all the companies to be taken over, isn’t one of the JSE’s accredited auditors. The requirement of proper reporting will make it extremely difficult to pay interest if there isn’t any real underlying cash flow income.

Put another way, what we’re trying to say is that transparent financial statements required for listing could possibly cause a bit of a problem for the payment of interest in Sharemax’s capital projects – such as the dream of a golf estate at The Bay.

Second, investors – especially those watching the slow construction work at the massive The Villa shopping centre – must remember the mere listing of a portfolio of properties doesn’t create new cash flow to, for example, complete the projects.

To obtain new capital, even big guns such as Anglo American and BHP Billiton must make a rights issue of new shares to existing shareholders and the JSE’s listing requirements also state an underwriter – that is, someone who guarantees the success of the rights issue – is required. This underwriter must be someone of substance, such as a bank, and banks usually look very closely at financial statements before they’re prepared to guarantee an underwriting.

Briefly, what we’re trying to say is the mere listing of shares is no guarantee that there will be new money available. You only have to look at the difficulties AltX-listed property developer Pinnacle Point Group is experiencing in trying to obtain new capital.

Finally, the existing investors in Sharemax’s promotions, such as Zambezi and The Villa, mustn’t become excited by thinking they’d be able to sell their shares in the new arrangement (if it ever comes about).

Remember: a listing doesn’t mean liquidity yet. In fact, Bonatla’s current shares are hardly being traded.

To bring about the proposed takeover of all Sharemax’s promotions, Bonatla will – according to our calculations – have to issue more than 50bn new shares at the current share price of 8c to 9c. This could make Bonatla the company on the JSE with the most issued shares.

My calculations – let’s call them estimates – of the current cash flow of the Sharemax promotions included in the takeover, plus the need for new capital to complete The Villa, show the new listed Bonatla will experience a negative cash flow for at least the first few years. So there will be no possibility of a dividend. That means for the first few years there will have to be many new shareholders keen to sell their shares. After all, they invested in the original Sharemax products on the strength of promises of good interest and, more recently, even dividend income. The share price of the new listed Bonatla could therefore probably remain under pressure for a long time.

The existing investors in Sharemax’s products are advised not to become excited about the so-called listing. Finweek suspects the JSE will scrutinise the transaction for a long time and wouldn’t risk a bet on the bourse eventually approving the takeover.