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Control of the National Lottery is at stake as JSE-listed hospitality and gambling giant Hosken Consolidated Investments (HCI) battles it out with Ithuba, the operator running the country’s biggest gambling licence since 2015.
HCI is fighting to exercise so-called oversight and “step-in” rights in terms of funding it gave Ithuba at the time, despite this funding having been fully repaid.
Step-in rights are a far-reaching remedy meant to protect HCI’s interests after it funded Ithuba, and involves it taking over the role of Ithuba’s managing agent for the Lotto from the incumbent, Zamani Marketing and Management Consultants.
This comes with a 1% fee on Ithuba’s revenue as well as powers to appoint or fire employees and, importantly, directors.
Zamani, the managing agent, is also the largest shareholder of Ithuba with a 34% shareholding.
Its shareholders, in turn, are businesspeople Charmaine and Eric Mabuza.
Charmaine is also the CEO of Ithuba and Eric a board member. Both would presumably face the chop if HCI got the step-in rights it wants.
Ithuba is fighting to get out of its arrangements with HCI altogether after repaying all its debt plus interest to the company in 2016.
HCI says the contract between them prohibits paying off the debt early and it has refused to acknowledge these repayments of more than R420 million.
The battle originated shortly after Ithuba began running the Lotto in 2015 and has been raging ever since.
The parties finally agreed to arbitration and their case was heard by an arbitrator last month.
The outcome, which will determine who runs the biggest gambling franchise in the country, is expected next month.
City Press has obtained copies of both parties’ heads of argument in the arbitration.
One of Ithuba’s less legalistic arguments is that the step-in rights are meant to protect HCI’s funding, but is being exercised despite this funding being repaid, which should make protecting it redundant.
HCI, in effect, not only wants to run the Lotto, but also the 1% management fee it said it should be getting instead of Zamani, backdated to January 2016. This would amount to about R200 million.
Over the course of the licence, this fee would be R480 million.
In its heads of argument at the arbitration, HCI justifies its refusal of early repayment by saying that the “true characterisation” of the funding it gave Ithuba was that of an “investment in a project”.
“HCI does not look to make short-term investments ... HCI’s investment would run for a number of years, most probably for the entire duration of the licence.”
FRAUGHT FROM THE START
Ithuba won the Lotto licence after a bidding process in 2014, with its takeover of the Lotto happening in mid-2015.
But the previous operator, Gidani, repeatedly took the awarding to court. This led to Ithuba being unable to get the funding it needed from banks because it risked losing the licence.
Among other things, a successful bidder needs to meet a certain “probity” level of funding to take over the Lotto.
HCI came to the rescue with funding ultimately totalling R341 million – and a hefty interest rate of 25%.
The initial funding arrangement was relatively complex and involved HCI buying a preference share in Ithuba in exchange for the funding, which came with an agreement giving HCI many protections and rights.
The department of trade and industry was, however, instructed in a court order from one of the Gidani cases to have this arrangement restructured into a more straightforward loan.
This was done with the understanding that HCI and Ithuba would revisit the structure of the funding later.
Much of the current dispute revolves around which terms from which version of the parties’ agreements are actually enforceable.
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