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Questions over new Denel partner

A company under investigation for a questionable government tender looks set to partner with Denel after agreeing to buy 49% of its armoured vehicle subsidiary, LMT Holdings.

The acquisition has been priced at R200m, plus a similar amount in loan finance.

Denel introduced the company as a potential suitor for LMT just one month after President Jacob Zuma publicly instructed the Special Investigating Unit (SIU) in May to investigate Laman Financial Services, now renamed Kwane Capital.

When Denel bought a 51% stake in LMT in 2012,  it justified the acquisition on the basis it intended to use LMT as an in-house manufacturer for the R10bn Hoefyster contract to supply the South African National Defence Force with armoured vehicles. But the vast material of the work did not materialise and LMT has experienced severe cash-flow problems in recent months.

In July, LMT’s minority shareholders approached the High Court in Pretoria to sever their relationship with Denel, alleging that Denel had intentionally starved LMT of capital and diverted the lucrative Hoefyster contracts to  VR Laser Services, a company owned by the Gupta family and associates.

Denel denied the claim and the court dismissed the bid.

Despite LMT’s dire financial state, it remains a valuable acquisition — the court papers described it as holding “critical intellectual property” and in recent months there have been a number of offers from rival groups of shareholders.

” … in-principle agreement … “

Headed by controversial businessperson Mcebisi Mlonzi, Kwane Capital began wooing LMT around June. Although it had no known defence industry experience, it put in a R100m initial bid. Denel said last week there was an “in-principle agreement between all the minority shareholders of LMT and Kwane Capital on a share purchase/sale deal”.

Neither Denel, Kwane nor LMT’s minority shareholders would comment on the details, but two insiders told amaBhungane that Kwane would now pay R200m to buy the 49% stake held by LMT’s minority shareholders, which includes buying out LMT’s existing empowerment partner, Pamodzi Group, led by Ndaba Ntsele. Both insiders said Kwane had also offered to extend a R200m loan.

Denel denies it hand-picked Kwane to be its new business partner. “As it was common industry knowledge that LMT was in financial difficulty, Kwane Capital provided an unsolicited LMT funding bid,” said Denel spokesperson Pam Malinda.

“At the time Denel was in fact talking with many other third parties, other than Kwane Capital. On receipt of this offer, Denel then engaged with Kwane Capital to consider the offer and establish whether it was worthy of being presented to the LMT shareholders or not.”

The connection between Kwane and Laman Financial Services, the company named in the SIU proclamation, seems to have eluded Denel, despite a due diligence. “Appropriate background checks were performed by Denel prior to presenting the offer to the other shareholders,” Malinda said.

“Denel was satisfied that there was nothing found that warranted that Kwane’s offer be disqualified.” Malinda also said Kwane’s “was the only offer that provided confirmation of availability of funding from a banking institution”. Kwane changed its name in 2014, company records show. This was done shortly after it had won a R95m tender to supply road building equipment to Amahlathi Municipality in the Eastern Cape that at the time had a reported annual budget of only R180m.

“Busy with an investigation as per the proclamation”

In the proclamation gazetted in May, Zuma instructed the SIU to investigate Laman Financial Services — “its directors, employees or agents”.

SIU spokesperson Sefura Mongalo would not divulge details of the SIU’s investigation, but confirmed it was “busy with an investigation as per the proclamation”.

When asked why it had pursued a partnership with a company under investigation by the SIU, Denel initially asked for proof of the investigation. When amaBhungane provided the Government Gazette, it responded: “Denel was not aware that Kwane is under investigation by the SIU, so once the facts are established, Denel will … take appropriate action.”

Kwane turned amaBhungane away from its brand new offices in Sandton.

Director Clive Else, who joined the company in February, declined to comment beyond saying that the LMT deal was “a purely commercial transaction; it’s all above board”. He also said that the SIU “has nothing to do with the transaction”.

It is not the first time that government contracts awarded to Kwane Capital and Mlonzi have come under scrutiny. In 2002, Mlonzi’s company Zama Resources was investigated by the Public Service Commission after the company made a R55,000 payment to the chairperson of a bid committee that awarded Zama a lucrative forestry contract.

The investigation found that Zama would have won the contract anyway, but recommended that the official be reprimanded for failing to disclose the payment.

Last year, two Kwane contracts with Eastern Cape municipalities ended up in court.

In the case of Port St Johns Municipality, Kwane had allegedly tried to claim additional fees on a contract, while Engcobo Local Municipality cancelled a tender with Kwane after the company failed to deliver tipper trucks. In both cases, the court ruled against Kwane.

Mlonzi’s name also surfaced in April 2016 when it emerged that Kwane had paid for a private jet to fly Mzwandile Masina, then deputy trade and industry minister, and former Western Cape ANC secretary Songezo Mjongile to the ANC’s manifesto launch in Port Elizabeth. At the time, Mjongile claimed to be a director of Kwane, but this does not reflect in company registration records.

The amaBhungane Centre for Investigative Journalism produced this story. Like it? Be an amaB supporter and help us do more. Sign up for
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Susan Comrie
Susan Comrie
Investigative Journalist at amaBhungane Centre for Investigative Journalism

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