Occasionally controversial and often over-the-top entrepreneur Vivian Reddy, it seemed, had promised to hand out money for free.
“In effect I am giving away R2-billion of our future wealth,” Reddy said in a press release given out at the launch of a scheme to sell shares in a R3 000-a-night hotel in Umhlanga, KwaZulu-Natal.
Regional newspaper The Post later apologised for misrepresenting the facts with its initial headline but maintained that “Reddy wants to share his wealth with the people of South Africa”.
Reddy is firm that this is the case. Selling shares in the Oceans Hotel, he told the Mail & Guardian this week, “is an act of goodwill”, and the M&G’s interpretation of his company’s prospectus “sadly reflects a cynical and almost mischievous appraisal” of a solid investment.
Should it succeed, however, the scheme will see him personally profit on paper to the tune of R103-million while putting no cash into a business funded entirely by the “domestic workers” he hopes to attract.
An analysis of the company’s forecasts also shows that Reddy will personally benefit handsomely down the line from the savings achieved by using shareholder money rather than interest-bearing debt to fund the hotel.
According to its prospectus, the 206-room Oceans Hotel, to trade under the Radisson Blu name, will cost some R600-million to build. Reddy and partner Robert Alexander intend to raise just about all of that by selling shares at R20 each in minimum investments of R1 000 a person.
Having paid their dues, those new shareholders will join two existing shareholders — Reddy and Alexander. Through two layers of corporate personas each of them received 12.5% of the hotel company at a price of one cent a share. At the R20 a share they intend to charge others, each man’s shareholding would be worth R103-million.
Asked to comment on that calculation this week, Reddy, speaking for himself and Alexander, said:
“We reject this assumption. We honestly cannot understand your level of economics and quality of assertions.”
(Stripped of corporate trappings the calculation is a simple multiplication of numbers drawn from the prospectus Reddy signed: his half of the issued shares is 51 342 335, which, when multiplied by R20 each, equals R102.6-million.)
In apparent compensation for what are in effect free shares, Reddy and Alexander will be in the back of the queue for dividends from their shares — in the first three years of operations, during which the new hotel is likely to have little if any cash available to pay dividends.
Asked to comment on this, Reddy said: “This is a wrong assumption as our experts’ research and financial model reflect a different picture.”
In partial recompense for missing out on possible dividends, though, the two developers have retained for themselves the right to appoint the hotel’s directors until May 2021. “Holdco [a vehicle jointly owned by entities representing Reddy and Alexander’s interests] may, until conclusion of the company’s 5th AGM following 20 May 2016, appoint the board of directors to the company,” the hotel prospectus says.
There is no provision for the remaining 75% of shareholders to be represented on their company’s board, where decisions on matters such as dividends will be made.
Reddy this week said this interpretation of control “is incorrect as the esteemed board of directors which constitutes some of the most credible and influential South Africans, including a retired judge president, consists of [sic] 80% of the board”.
Company records list only Reddy and Alexander as directors and the company’s prospectus lists only one other director, Graham Ian Wood. Wood is not a former judge president.
Once other investors put up all the cash, how that money is handled will be up to Reddy and Alexander at multiple levels of control. Of the R600-million to be raised, R56-million is to be paid to a development company — of which Reddy and Alexander are directors — for the right to build the hotel. Another R531-million will also be paid to that development company to build the hotel.
Reddy said it is incorrect to assume that he and Alexander will retain control of the outgoing money. It would be “governed by the project management team as well as the board of directors of the hotel company”.
Until the hotel is completed the individual investors will be left with 75% of a company into which they had put 100% of the cash, a company that will own no asset more notable than the right to build the hotel and a company over which they will have no effective control for at least five years.
Reddy and Alexander, meanwhile, stand to gain quickly, and in cash, from “giving away” future profits. According to their prospectus, funding just 25% of the hotel from normal interest-bearing bank loans, rather than money from small shareholders, would reduce their individual shares of the first two years of profits to less than R400 000. Should they convince enough shareholders to invest on their terms to build the hotel without such loans, each man will earn R3.2-million instead.
Reddy said this calculation was “totally incorrect” but that he could not comment on the numbers “as the basis on which you have performed your calculations is unknown to me”.
The calculation is done by adding together the profit numbers from two different scenarios published in the prospectus, and dividing by eight.
Small investors of extremely limited means were clamouring to get involved in the deal, said one person peripherally involved in publicity around it.
“They’re phoning to say they are pulling out all their pension money, all their savings, and they want to invest it all.”
In response to questions Reddy said 60 000 people had already registered their interest in the share offer.
“Every person who registers their interest to purchase shares is doing so on the full understanding that they are entering into a business transaction,” Reddy added. “This is obvious from all our advertising material and press releases.”
What they would be investing in, Reddy said, “in the principle, model and execution is no different from buying shares in the stock market, which is subject to all the vagaries of market forces both ponderable and imponderable”.
Asked whether he would be concerned when people of limited means invest all their savings into the project, Reddy was unequivocal.
“We have no concerns at all as this is a great investment opportunity with super returns.”
Investors, he said, could always seek outside investment advice.
Reddy said he and his partner were sacrificing a total of R55.46-million to the project by not claiming immediate benefits or a management fee.
Asked why he was not investing his own money, Reddy said the question was “cynical and grossly incorrect”, referred to a broader development in which hotel shareholders will hold no part, and said it was important to spread wealth.