Publications
Partners
A YEAR AGO, rail and electrical engineering specialist Racec loaned R10m to its empowerment partners Solethu Civils to fund part of a R45m black empowerment investment. A year later Solethu – an infrastructure specialist in its own right – is advancing R10m to Racec ahead of a R10m rights issue to allow the (hopefully temporarily) cash-strapped company to latch on to new contracts worth R140m.
Perhaps that arrangement is the way more empowerment relationships should work? Maybe… but you probably need to study what’s transpired at Racec lately before getting all warm and fuzzy about quid pro quo funding arrangements. In the year to end-September 2009, Racec – which initially looked like one of the more robust new listings on the AltX – posted a shock R15m pre-tax loss after business conditions turned ugly in the second half.
While directors – also the company’s main shareholders – looked a tad shell-shocked at developments, we can’t help flinching when regarding the timing of Solethu’s empowerment foray. The empowerment group agreed to pay 130c/share to snag a quarter of Racec’s issued shares. At the time of writing, Racec’s share price had dribbled down to 28c.
Fortunately, Solethu has a partial “escape clause”. Attached to the empowerment deal was a PUT option for the specific repurchase of around 27m Racec shares from Solethu Civils at 130c/share. That will kick in if Racec’s normalised earnings for the financial year to end-September 2010 are less than the original subscription price based on a five times multiple.
So Racec needs to produce earnings of 26c/share – highly unlikely given its latest trading update, which predicts a small loss for the interim period. The PUT option isn’t a straightforward repurchase of shares initially placed with Solethu. Instead, the PUT option involves Racec subscribing for “B” class ordinary shares in Solethu Civils. Those “B” class ordinary shares hold no rights to dividends or other distributions and aren’t entitled to any return of share premium. It would appear the chaps at Solethu have Racec by the short and curlies.
The rights issue – which proposes issuing 25m new shares at 40c/share – should increase Racec’s chances of snapping back into the black for its full financial year. But the terms of the rights issue appear to shift the power at Racec away from its directors and towards Solethu.
Obviously, there was urgency to bring fresh capital into Racec and by obliging with the bridging finance it seems Solethu has negotiated itself a lucrative underwriting position in the rights issue. Racec’s directors – including chairman Mike Uys and former CEO Charles Harrod – will relinquish their rights to participate in the rights offer. Collectively, the directors speak for 40% of Racec’s issued shares.
With the rights offer price pitched well above its current share price it seems likely Solethu could take up the vast majority of the new shares on offer. Finweek wouldn’t bet against Solethu’s shareholding finishing up at more than 30% of Racec.
One can understand Racec’s directors were in a bit of an invidious position, with capital not exactly in easy grasp of a small cap company these days. Ordinary shareholders have a slightly easier decision to make. With the share price stuck at under 30c it’s probably easier to preclude dilution by buying shares on the open market than participating in a 40c/share rights offer.
Perhaps that arrangement is the way more empowerment relationships should work? Maybe… but you probably need to study what’s transpired at Racec lately before getting all warm and fuzzy about quid pro quo funding arrangements. In the year to end-September 2009, Racec – which initially looked like one of the more robust new listings on the AltX – posted a shock R15m pre-tax loss after business conditions turned ugly in the second half.
While directors – also the company’s main shareholders – looked a tad shell-shocked at developments, we can’t help flinching when regarding the timing of Solethu’s empowerment foray. The empowerment group agreed to pay 130c/share to snag a quarter of Racec’s issued shares. At the time of writing, Racec’s share price had dribbled down to 28c.
Fortunately, Solethu has a partial “escape clause”. Attached to the empowerment deal was a PUT option for the specific repurchase of around 27m Racec shares from Solethu Civils at 130c/share. That will kick in if Racec’s normalised earnings for the financial year to end-September 2010 are less than the original subscription price based on a five times multiple.
So Racec needs to produce earnings of 26c/share – highly unlikely given its latest trading update, which predicts a small loss for the interim period. The PUT option isn’t a straightforward repurchase of shares initially placed with Solethu. Instead, the PUT option involves Racec subscribing for “B” class ordinary shares in Solethu Civils. Those “B” class ordinary shares hold no rights to dividends or other distributions and aren’t entitled to any return of share premium. It would appear the chaps at Solethu have Racec by the short and curlies.
The rights issue – which proposes issuing 25m new shares at 40c/share – should increase Racec’s chances of snapping back into the black for its full financial year. But the terms of the rights issue appear to shift the power at Racec away from its directors and towards Solethu.
Obviously, there was urgency to bring fresh capital into Racec and by obliging with the bridging finance it seems Solethu has negotiated itself a lucrative underwriting position in the rights issue. Racec’s directors – including chairman Mike Uys and former CEO Charles Harrod – will relinquish their rights to participate in the rights offer. Collectively, the directors speak for 40% of Racec’s issued shares.
With the rights offer price pitched well above its current share price it seems likely Solethu could take up the vast majority of the new shares on offer. Finweek wouldn’t bet against Solethu’s shareholding finishing up at more than 30% of Racec.
One can understand Racec’s directors were in a bit of an invidious position, with capital not exactly in easy grasp of a small cap company these days. Ordinary shareholders have a slightly easier decision to make. With the share price stuck at under 30c it’s probably easier to preclude dilution by buying shares on the open market than participating in a 40c/share rights offer.
