The Public Investment Corporation (PIC) waived its normal due diligence processes to invest R4.3 billion in media mogul Iqbal Survé’s latest venture.
The decision, according to an explosive set of documents City Press received on Saturday, was based on “very optimistic” forecasts and taken without access to proper financial information.
Insiders now believe that the state-owned asset manager has in effect given Survé’s Sekunjalo group the money it needs to repay an earlier PIC loan.
Survé was not available for comment late on Saturday.
The PIC manages the pension savings of state employees in the Government Employees Pension Fund. It also manages other investments for the state.
Sekunjalo owes the PIC more than R1 billion it was lent to acquire Independent News and Media SA in 2013.
The R4.3 billion investment into Ayo Technology Solutions, which listed on the JSE on December 21, was approved on December 20 at a special meeting of the PIC’s portfolio management committee for listed investments.
Apart from PIC chief executive officer Daniel Matjila and chief financial officer Matshepo More, almost all the usual executives and managers who would have attended such a meeting were on leave. Acting heads and managers took their place.
The deal was that the PIC would buy a 29% stake in Ayo in a private placing before it listed – for R4.3 billion.
Of this sum, R1 billion would be paid to Sekunjalo’s main listed holding company, African Equity Empowerment Investments (AEEI), in exchange for AEEI’s 30% shareholding in BT Communication Services SA.
Another R80 million was to be used to pay off an inter-company loan owed to AEEI.
Now, Ayo would own 30% of BT as its main asset, which is the basis of its entire business plan, while AEEI would have almost R1.1 billion in cash.
Documents detailing the deal produced by PIC staff portray it as a risky and speculative venture – relying solely on the majority black ownership of Ayo on which to base their claims that its revenue will increase spectacularly.
One of the attendees at the December 20 meeting sent AEEI chief investment officer Abdul Malick Salie a message saying the “committee believes the issue price is very high and as such we require downside protection”.
This was to take the shape of a put option – a contract that allows it to sell the shares back to Ayo at a predetermined price. This would protect it against a share collapse.
Documents City Press obtained, however, show that this put option was not in place in January – well after the investment was made.
Even though the resolution said the deal was subject to getting this put option, it went ahead anyway.
Before that, the PIC’s staff sounded warnings about the deal.
In a memo dated December 14, it is noted that Ayo had repeatedly failed to provide the financial information for BT, the asset underpinning its dramatic forecasts of future growth.
“On November 16 2017 and twice since we requested historical financial statements for BT. As at the date of this memo, Ayo management has not yet provided the said information,” the memo reads.
According to the document, Ayo management’s forward-looking estimates are “very optimistic”.
“Given that the majority of growth is premised on market share gains from acquisitions and empowerment, there is a risk that the anticipated additional revenues may not materialise,” it says.
“Ayo’s strategy depends heavily on its empowerment status. Empowerment credentials can be replicated by competitors such as EOH, Accenture, Dimension Data etcetera.”
The forecasts provided to the PIC are that the company’s current revenue of under R500 million per year will rocket to over R9 billion in 2020.
Less than half of that is explained by the acquisition of BT.
A report from the PIC’s risk committee, dated December 15, says the investment should only go ahead under specific conditions, to protect the PIC.
These include that the PIC receive “market-related fees” for underwriting Ayo’s share placement. This condition was apparently waived.
In addition, the PIC was concerned about the intermingling of board members between Ayo and AEEI. This meant that “there might not be a clear balance of power”.
Also on December 15, days before the PIC made the investment, its managers formally asked that the normal due diligence requirements be waived.
City Press has seen this letter, signed by Matjila and the managers of the PIC’s listed equities department.
At the December 20 meeting, PIC officials still fretted. The minutes reflect that “no historical annual financial statements were available”.
The minutes indicate the concern that the money could flow back to Sekunjalo and effectively lead to the PIC giving the group the money it needed to repay its debts to the PIC.
“There should be no linkage between the proceeds of the IPO (initial public offering) and Project Iris,” the minutes state.
The PIC gives code names to all its unlisted investments. Project Iris is the loan it gave Sekunjalo to buy the Independent group.
Approached for comment on Saturday, PIC spokesperson Deon Botha said: “We will deal with the specific questions you are raising as soon as possible.
“However, for now, it is enough to point out that all the investments that the PIC undertake follow a thorough investment process. Ayo Technology is not any different.”
Before and after listing, Ayo has received uniformly positive coverage from the Independent group’s daily Business Report.
The shares have scarcely been traded at all on the JSE since the listing. Only about 0.16% of its shares have traded in three distinct tranches.
Documents City Press obtained also show the PIC’s own credit risk committee told it not to go ahead with a deal in July 2017 that exposed it to the collapse of Steinhoff through its unlisted investment arm.
At the time, the PIC already funded Jayendra Naidoo’s acquisition of 2.75% of Steinhoff to the tune of R9.35 billion, through his empowerment group Lancaster.
This transaction, code-named Project Sierra, was however fully secured by a schedule ratio collar – a kind of insurance contract.
Last year, Naidoo approached the PIC for a new deal when Steinhoff merged its African operations with Shoprite to create the separate listed company Steinhoff African Retail (Star).
The idea was to support Lancaster’s participation in the deal.
It was called Project Blue Buck and involved the PIC surrendering some of its security in favour of the US Citi Bank.
“Risk is of the opinion that the security compromise may harm the reputation of the PIC in foregoing its current security package in favour of another lender,” reads the report from July last year.
The new deal meant that the PIC lost its collar agreement, but did receive some Star shares as security. At the time, Star did not even exist.
As a result of this deal, the PIC would have suffered additional losses due to the Steinhoff collapse late last year – in addition to the losses it suffered from being a direct shareholder.
The PIC’s listed arm lost about R20 billion in the Steinhoff collapse.